2013 has been the year in which even the most hardened stock market bears have admitted that we’re in a five-year bull market — and it’s not over yet.
Although the FTSE 100 has slipped back from the five-year high of 6,875 it reached in May, it is still up 8% this year, and is 52% higher than it was five years ago. As Christmas approaches, I’ve been asking whether popular stocks like Aviva (LSE: AV) (NYSE: AV.US) still offer good value, after five years of market gains.
Back to basics
Aviva’s share price has gained 9.5% this year, leaving it slightly ahead of the FTSE. However, Aviva’s share price is just 11% higher than it was in December 2008, and it’s been a frustrating five years for long-term shareholders.
However, billionaire investor Warren Buffett says that one of the most important lessons he learned from value investing pioneer Ben Graham, is that “price is what you pay, value is what you get”.
As current buyers and shareholders of Aviva, we need to focus on the value that’s on offer today:
| Ratio | Value |
|---|---|
| Trailing twelve month P/E | n/a |
| Trailing dividend yield | 3.5% |
| Operating margin | 5.0% |
| Combined operating ratio | 96.2% |
| Price to book ratio | 1.5* |
Last year’s losses mean that Aviva doesn’t have a meaningful P/E ratio at the moment, but if we assume that second-half earnings will be similar to its first-half performance, it currently trades on a P/E of around 9.5, which looks cheap enough to discount the recovery risk which still attached to Aviva’s business.
At just 3.5%, Aviva’s trailing yield isn’t anything to write home about, although it is still above the FTSE 100 average of 3.2%.
Where next for Aviva in 2014?
Aviva has made concrete progress with its recovery plan this year, selling off its insurance businesses in the Netherland and the US, and boosting the value new business in key European and Asian markets.
The group is expected to report full-year earnings of 43p per share in 2013, and to increase the final dividend by a penny or so. The forecast for 2014 is more of the same, which could make it an attractive buy, in my view:
| Aviva 2014 Forecast | Value |
|---|---|
| 2014 forecast P/E | 9.0 |
| 2014 forecast yield | 3.9% |
| 2014 forecast earnings growth | 8.5% |
| P/E to earnings growth (PEG) ratio | 1.1 |
The insurance sector currently trades on a median P/E ratio of 12.9, with median forecast earnings growth of 5.2%. In my view, Aviva is likely to outperform its sector next year, and the market may re-rate its share price accordingly — a P/E of 11 in 2014 could value Aviva shares at around 510p.
