Insurance Giant Cuts Its Long-Term Market Projections

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Insurance giant Prudential (NYSE: PRU) recently cut its expectations for long-term stock market returns by over a full percentage point. That's a huge statement and one that has a massive impact on an insurer's business. However, it could also have a big impact on your portfolio, too.

The accounting underpinning the insurance industry is very complex. In fact, most analysts who cover the industry have a hard time keeping track of all of the moving parts. However, the basic business model in the space is pretty simple: Take money from customers for the promise of insurance overage and invest that money profitably over time. There is a lot more going on than that, but a quick look at the long-term success of Warren Buffett's Berkshire Hathaway (NYSE: BRK-B) is, perhaps, the perfect example. The so-called oracle of Omaha basically uses the insurance shell to fund his company's stock investments.

This has worked out quite well for Buffett and Berkshire shareholders, and it has also worked out well for some other large insurers over the long-term. That said, it helps explain why the performance of the stock and bond markets is so important in the insurance industry. That Prudential is saying that it has lopped more than a full percentage point off of its long-term market expectations is notable.

Although the evidence of the last decade or so is to the contrary, many investors look at the market and expect annualized returns in the 10% area. This is much better than the 20% figure that was frequently thrown around in the late 1990s, just before the technology driven crash. Still, Prudential's expectations are several percentage points lower. Other smart individuals, including John Bogle of Vanguard fame and John Hussman of the Hussman Funds have even more dire expectations, going as low as the 5% range.

Five percent annualized returns is pretty low by historical standards, but presents dividend investors an interesting target. If the market is only expected to return between 5% and 8%, on average, finding financially strong companies that can get you at least half way, or all of the way, there suddenly seems more attainable. Some options today include:

Lockheed Martin (NYSE: LMT)
Yielding nearly 5%, Lockheed Martin is an interesting stock right now given the spending cuts that are slated to take place in the U.S. defense budget. The market hates uncertainty and has treated Lockheed and the entire defense industry a little roughly of late because of the so-called sequestration cuts that have been written into law. These cuts will be painful for the industry if enacted, but most agree that the draconian cuts are not likely to take place. And, even if they do, it is still unclear how they will impact industry participants.

With its massive scale and reach, Lockheed Martin will definitely feel the pinch of any cuts, but it is also very likely to survive any cuts that do take place. Longer term, the company is probably one of the best positioned defense companies around. Its fingers extend into virtually every aspect of the industry from space exploration to military services, including expanding operations in the technology space. The best part is that Lockheed's dividend is large and has historically been increased on an annual basis. If the market returns 8% on average over the next decade, Lockheed's dividend gets you half way there, requiring just 4% average annualized stock appreciation to make up the difference. That said, if the market performs worse, you stand to be in an even better position.

Kinder Morgan (NYSE: KMP)
Kinder Morgan's yield is over 6% of late and its distribution is tax advantaged since it is coming from a limited partnership. The math is pretty simple, too, 6% is well more than half way to the 8% figure. Better yet, this yield comes from one of the largest and best positioned energy infrastructure investments around.

Indeed, Kinder Morgan makes money by operating “toll” businesses, including approximately 75,000 miles of pipelines and 180 terminals. It transports or handles such things as natural gas, an expanding energy source in the United States, refined petroleum products, crude oil, carbon dioxide, gasoline, jet fuel, ethanol, coal, petroleum coke, and steel. Its customer list includes some of the largest energy companies in the world.

Although owning a limited partnership will likely require a little more effort at tax time, the yield and financial strength of Kinder Morgan is probably worth the effort. Note that the company has a long history of dividend increases, too.

Yielding around 4.5%, Dow-30 component Intel is an option for more aggressive investors. A leader in the computer chip space for years, it is a laggard in the cell phone chip market. A shakeup in the the CEO's office adds to the uncertainty over the company's future. However, there are positives, too.

For example, the mobile web still needs vast server farms to support it. Intel is inside many of the computers that support this land-locked side of the business. Additionally, Intel is financially strong and can use that strength to both continue paying its dividend and to support its efforts to push further into the cellular chip space. This could come from internal research efforts or via acquisition. The latter is a tactic that Intel has made extensive use of over the years.

Still, the uncertainty surrounding the company is high right now and conservative investors might be better off looking elsewhere. However, those with strong stomachs can get more than half way to the market's return if they take advantage of what looks to be a discounted share price. Watch the new CEO carefully, however, to get an idea about the direction he or she is taking this industry giant.


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ReubenGBrewer owns shares in several Hussman Funds, but has no positions in the stocks mentioned above. The Motley Fool owns shares of Intel and Lockheed Martin. Motley Fool newsletter services recommend Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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