Why Aviva plc is still my pick of the insurance sector

The whole insurance sector looks cheap, and Aviva plc (LON: AV) could be the cheapest.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I won’t try to hide the disappointment I felt when my investment in Aviva (LSE: AV) slumped in value in the days following the Brexit referendum.

Between voting day on 23 June and the evening of 27 June, Aviva shares lost 22%, and that’s got to hurt. But unlike many others who sold in panic, I didn’t because I saw no fundamental reason for our forthcoming departure from the EU to damage Aviva’s long-term prospects.

In fact, the very next day after the vote, Aviva told it had “conducted extensive analysis of the possible implications of a vote to leave the EU and considers it will have no significant operational impact on the company“.

I’m comforted by the fact that Aviva shares quickly recovered the loss and today stand 3% above their pre-referendum price at 457p, yet I feel for those who lost money by following the short-term panic. But what about now?

Aviva has two years of earnings forecasts on the cards, only slightly lowered since the City’s pre-Brexit prognostications, and that would put the shares on a P/E rating of 11 this year, dropping to under 10 on 2017 forecasts. On top of that, we’re expecting well-covered dividend yields in excess of 5%.

At first-half results time in August, Aviva reported a 13% rise in operating profit, with cash remittances up, and the interim dividend was lifted by 10%. Chief executive Mark Wilson told us that “We are growing in the UK, we are investing in the UK. We like the UK. And we are also benefitting from Aviva’s diversity, with 42% of our earnings coming from outside of the UK“.

That still sounds like a buy to me.

Undervalued bargain?

I’ve owned shares in RSA Insurance Group (LSE: RSA) in the past, back when they seemed seriously undervalued and were paying irresistible dividends. That particular undervaluation was outed and I sold at a profit, but today I still see the firm as a good-value long-term investment — even after a 45% gain since a low point in February this year.

The forecast P/E multiple of nearly 18 based on this year’s forecasts would usually be seen as stretching, but an EPS growth of nearly 40% on the cards for next year would drop that to under 13, and dividends are expected to come storming back to yield 3.8%.

The share price saw a brief Brexit blip, but since a low in February we’ve seen a 45% climb to 535p, so it looks like the institutional investors are seeing RSA as a solidly recovering insurance investment. I agree.

How much cash?

On the dividend front, it’s hard to ignore the oodles of cash that Direct Line Insurance Group (LSE: DLG) has been handing over to shareholders in recent years.

The motor insurance firm paid 13.8p per share as an ordinary dividends in the year to December 2015. But special dividends, including the proceeds from the sale of the firm’s International division, took that up to a handsome a cash handback of 50.1p p share.

The total dividend forecast for this year of 32p would provide a yield of 9% on today’s 355p share price, and we’re looking at a company offering cash-generative insurance services in the UK and which should be immune to Brexit, Trump, and any other international bogeymen that are sent to scare us.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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

More on Investing Articles

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »