Why Are Prudential Shares (LON: PRU) A Big UK Gainer?

Prudential shares (LON: PRU) were one of the big gainers on the London stock exchange today, as the price closed up more than 7% on news of a hefty stock buyback.

Prudential PLC has announced a new shareholder capital returns policy that came as a pleasant surprise to the markets. The move involves a substantial $2 billion share buyback, which represents a generous 8% of the company's current market cap, and is set to be completed by mid-2026.

Industry experts have remarked that the scale and timing of Prudential's share buyback were largely unexpected. Analysts had not foreseen such an aggressive capital return plan, particularly its initial $700 million tranche that is slated to start immediately.

UBS analysts were among those taken aback by the news, stating that both the size and schedule of the buybacks outstripped their projections as well as those more broadly held in the City. They noted that the funding for these buybacks would be sourced from Prudential's surplus capital, suggesting a robust financial standing.

Around $1 billion would likely be repurchased annually under the new capital management policy, maintaining the company's dividend growth guidance of 7-9% for the current year. This translates to approximately 4% of the market cap being bought back yearly.

Additionally, Prudential has put forth a new guiding principle pertaining to future share buybacks. This new policy sets a free surplus ratio range of 175-200%, decreasing from the previous rate of 242% at the end of the fiscal year 2023. The motivation behind Prudential’s decision to commence share buybacks could be attributed in part to the company's weak share price performance, especially when compared to AIA who have rivalled the firm in the market and been conducting buybacks for some time.

The announcement marks a significant step in Prudential's capital management strategy, aimed at maximizing shareholder value and demonstrates the company's confidence in its financial health and future prospects. How this will play out over the longer term is open to interpretation, but the short term result in today's trading was a resounding positive.