Higher Interest Rates Will Boost This Blue Chip Dividend Stock

In poker blue chips refers to the highest value pieces. In investing, blue chips refer to a specific type of company -- one that has a strong underlying profit machine and the ability to withstand any economic environment. When thinking about high-quality income, the best securities often have a stable and increasing dividend and a reasonable payout ratio. They are able to grow their dividends over time, which is why investors commonly refer to high-quality dividend stocks as blue-chip stocks. One blue-chip stock with a stable and growing dividend is Principal Financial Group . Principal Financial has a nearly 4% yield, and the company will benefit if interest rates continue to rise in the future. Business Overview Principal Financial Group, founded in 1879 and headquartered in Des Moines, IA, is a financial corporation that operates several businesses including insurance -- primarily life insurance -- and investment management, retirement solutions and asset management. Principal reported resilient financial results for the fourth quarter and fiscal 2020. The company saw its assets under management (AUM) grow to $807 billion to end 2020, partially due to rising equity markets during the last couple of months. Eighty percent of Principal's AUM outperformed their peer average over the last five years, while 74% of AUM holds a Morningstar rating of 4 or 5 stars. The company also saw its Retirement and Income Solutions business do well during the quarter, although the International segment was less profitable during the quarter. The company generated earnings per share of $1.48 during the fourth quarter, compared to $1.41 in the fourth quarter of 2019. For the year the company generated adjusted EPS of $4.94 compared to $5.58 in 2019. While results were down in 2020, the company still proved resilient amidst the ongoing COVID-19 pandemic. Growth Prospects During the 2010 through 2019 period Principal increased its EPS by an 8.8% average compound rate. This result was driven by solid top-line growth, a steady profit margin and a share count that declined by 1.6% per year on average. The company's asset management business, where Principal Global Investors and Retirement & Income Solutions are the main components, has benefited from solid assets under management growth in the past. A rising number of new customers also helps drive AUM, in addition to market appreciation in normal times. Net inflows and market appreciation allowed Principal Global Investors to report AUM growth during each of the last couple of quarters, except for first quarter of 2020, which was impacted by the coronavirus-caused equity market downturn. The company's asset management business is attractive for investors, as Principal's actively managed funds, ETFs, and other vehicles often performed better than the median of their asset class. As Principal has produced above average returns for its customers, new customers are attracted to letting Principal manage their wealth, which serves as a competitive advantage versus other asset management companies with a weaker track record. With its insurance business, Principal Financial Group has been able to grow its premiums and fees in the past, and a growing float that can be invested should result in rising investment income over the next couple of years. In addition, Principal can continue to boost its EPS growth by repurchasing shares. We are expecting earnings to bounce back in 2021 -- forecasting EPS of $6.15 -- to go along with a 5.0% intermediate growth rate. This would imply the potential for $7.85 in EPS in the next five years. Recession Performance The strong performance and ratings of Principal's actively managed funds, ETFs, and other products is a competitive advantage, as this increases the likelihood of customers choosing Principal to manage their assets. During the last recession Principal generated EPS of $3.01, $1.63, $2.69 and $2.62, respectively, during the 2007 through 2010 stretch. Meanwhile, the dividend was cut in half from $0.90 to $0.45. This is a cautionary note, although it should be underscored that this was during a financial crisis and earnings still covered the dividend throughout the period. Dividend Safety As noted, Principal cut its dividend during the last recession, but since then the company has been raising it at a solid rate each and every year -- from $0.45 in 2008 to $2.24 last year. While the payout ratio has grown over the last decade, Principal is still paying out less than 50% of its earnings in the form of cash dividends. Moreover, last year saw earnings dip amid a difficult 2020. Even so, this still leaves ample room to continue increasing the dividend at a rate roughly congruent with long-term earnings growth. Valuation / Expected Return Based on the recent share price near $58, a per-share quarterly dividend of $0.56 and $6.15 in expected EPS this year, Principal is trading hands with a 3.9% dividend yield, a 9.4 P/E ratio and a ~36% expected payout ratio. As noted above, if earnings were to grow by 5% annually, you would expect Principal to earn $7.85 or so after five years. Over the past decade the shares have traded hands with an average P/E ratio of about 11 times earnings. If you use this multiple, this implies the potential for a future share price of ~$86. Including dividends, this implies the potential for 11.4% annualized returns. This is an appealing potential rate of return for a quality dividend stock, and makes the stock attractive for both value and income investors. Final Thoughts Principal Financial Group has proven to be a resilient business over the years. During the last recession the dividend was reduced, but it is noteworthy that earnings still covered the original payout. In the last decade the dividend has been increasing nicely and during this recession the company has held up even better. Moreover, the shares could now be offering the opportunity for double-digit intermediate-term gains. In this way, Principal could be offering much more than its 3.9% blue-chip yield. Principal's high yield, low valuation, and positive growth outlook make it an appealing stock based on its potential total returns.

Higher Interest Rates Will Boost This Blue Chip Dividend Stock

Including dividends, we see the potential for 11.4% annualized returns for this stock.

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