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Why I’m Selling Prudential Plc To Buy Aviva Plc

I bought insurer Prudential plc (LSE: PRU) (NYSE: PUK.US) three years ago and I’m jolly glad I did, because its share price has roughly doubled in that time. I wish I could say the same for my stake in Aviva (LSE: AV.) (NYSE: AV.US), which has gone roughly nowhere, and at times has been in deep retreat. But now I suspect the tables are ready to turn, and I’m planning to take advantage before it is too late.

Investors have been so down on Aviva they have failed to notice recent signs of life. Its share price is up 21% in the last three months, against a 5.5% drop in the FTSE 100. Those dazzled by Prudential’s recent strong showing may have overlooked the fact that it has trailed the index lately, growing just 4% in that time. Although we shouldn’t read too much into short-term movements, I suspect this is the beginning of a trend.

Crowded house

Part of this is the contrarian in me. Aviva has a lot more scope for growth, because it is so long since it has delivered any. Over five years, it is down 23%, while Prudential is up 123%. At some point, however, the cycle has to move in Aviva’s favour. Chief executive Mark Wilson is working hard to accelerate the process, by bolstering the balance sheet, dumping underperforming assets, slashing debt and reducing headcount.

Prudential chief executive Tidjane Thiam has a different challenge, to keep the show on the road and his swelling crowd of investors happy. In many respects, his job is now harder. Any slowdown in Asia could torpedo investor sentiment, as we have just seen.

Wilson was recently celebrating 18% sales growth in the first quarter, thanks to a strong performance in UK life, Turkey and Asia. Thiam was also celebrating, with an 18% rise in first-quarter Asian new business, but there was trouble closer to home, with a 10% fall in the US, and 2% drop in the UK.

Aviva’s bad news is out there. Yes, that hefty dividend cut in March was painful but predictable, and it means new investors know what they are getting. Right now, that’s a prospective yield of 4.4%, against just 2.8% for Prudential. Aviva is also far cheaper, trading at eight times earnings, against 13.5 times for Prudential. True, it has been cheaper for a number of years without realising its potential, but at some point, that has to change. Aviva’s prospective earnings per share growth of 12% in 2014, marginally ahead of Prudential at 10%, suggests that cheap might finally be cheerful.

Boo to Pru

I’m taking one big fat risk here. Aviva is still exposed to further eurozone troubles, and as countries such as Portugal and Italy struggle to escape their debt dynamics, they could flare up at any moment. I will feed money in steadily, taking advantage of any dips. Prudential also has big macro risks in Asia, as the recent 3.1% fall in Chinese exports underlines, and it also faces troubles in the Indian life insurance market. I am tempted to dump some of my stake right now.

Aviva’s miseries leave plenty of upside, Prudential’s triumphs limit the chance for rapid profit growth. I plan to place some of winnings on the also-ran. Some may call that a punt, but I’m confident my gamble will pay off.

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> Harvey holds shares in Aviva and Prudential