The Beginners’ Portfolio Ponders Buying An Insurer


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The Beginners’ Portfolio is a virtual portfolio, with all costs, spreads and dividends accounted for. Transactions are for educational purposes only and do not constitute advice to buy or sell.

A lot of investors go for diversification, and it can make a lot of sense — if one sector goes through a bad patch, being diversified into others can help offset the pain. But at the same time, diversifying for the sake of it can be a bad move.

But there’s one sector that is very much in the throes of a recovery, and that’s finance — and we haven’t considered it so far. But what possibilities are there? Well, I’ve been eyeing up a couple of giants in the insurance sector, which really hasn’t been showing much in the way of gains yet…

Aviva

Aviva (LSE: AV) (NYSE: AV.US) has results coming out on Thursday, and the City is currently expecting a dividend yield of 7.3% for the year to December 2012 based on the current share price of 349p. But earnings forecasts are all over the place, with individual analysts guessing at wildly different figures, so it’s anybody’s guess whether such a payout would be covered.

Asset valuations are pretty important too, so I’ve added two more figures to our table below, with entries just for the two insurers. NAV is net asset value per share — the book value of all the company’s assets divided by the number of shares in issue. PBV, or price to book value, is the share price divided by the NAV.

From this, we can see that Aviva shares trade for less than their net asset value, which is a good sign, but we’ll need to watch out for that come results time.

RSA

The other is RSA Insurance Group (LSE: RSA), whose shares shares trade in excess of asset value at the moment — not outrageously so, but RSA is in second place to Aviva on that measure.

RSA has already brought us full-year results — and slashed its final dividend by a third! And the share price slumped by 15% in response. But the overall full-year yield is still a nice 5.8%, based on today’s price of 120p.

The fear, or course, is that Aviva will follow suit and cut its dividend, and the current share price does seem to factor in some of that possibility. We’ll know later this week.

Meanwhile, here’s our updated watchlist, with the two new entries — and I’ve sorted it into alphabetical order this time:

Company Market cap Price Forward P/E NAV PBV Fwd
Dividend
Aviva £10.5bn 349p 8.2 442p 0.8 7.3%
Daisy Group £286m 105p 8.1     1.3%
GKN £4.40bn 276p 10.0     3.0%
Ricardo £204m 401p 11.9     3.4%
RSA
£4.29bn 120p 9.5 108p 1.1 6.2%
Trinity Mirror
£292m 118p 3.9     0%
TUI Travel
£3.55bn 310p 11.5     4.0%
Unilever £34.1bn 2,664p 18.7     3.2%
United Utilities
£5.04bn 745p 18.3     4.6%
WS Atkins
£892m 870p 11.4     3.5%

Since our last look, quite a few have moved — mostly upwards!

What of the rest?

Out of the list, I’ve definitely lost interest in Unilever (LSE: ULVR), with the shares having risen 9.7% since we last looked. On a forward P/E of nearly 19 now, it seems fully valued to me. And that 3.2% dividend is nothing to shout about, so I can only reiterate my “Don’t Buy” stance. In other times I might have bought Unilever at this level, but I think there are just too many better bargains out there right now.

GKN (LSE: GKN) reported strong results last week. Sales for the year to December were up 13%, adjusted pre-tax profit was up 19%, earnings per share up 17%, and the dividend was lifted to 7.2p per share for a modest 2.6% yield on the latest price of 276p. That’s not a great yield, and there is only one slot left to fill in the portfolio — and GKN shares are already up 13% from last time.

So what will fill our slot? We’ll be deciding pretty shortly.

Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended Unilever. The Motley Fool UK owns shares of Unilever. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.