With the FTSE 100 trading on a price to earnings (P/E) ratio of 15.8, many investors may be feeling that there is a lack of value in the UK’s main index. After all, the FTSE 100 is within touching distance of the ‘Holy Grail’ of 7,000 points and, as a result, it may appear to many investors that this is not a good time to buy.
While some stocks may well be overvalued, the insurance sector still offers a highly desirable mix of value, income and growth. As such, now could be a good time to buy shares in insurance stocks – especially for the long term.
For example, Aviva (LSE: AV) trades at a discount to the wider index despite being a very high quality company that is in the midst of an impressive turnaround story. It has a P/E ratio of just 11.2 and yet is forecast to increase its bottom line by 4% in the current year, and by a further 11% next year. In addition, its acquisition of Friends Life could create significant synergies for the combined entity and lead to upgraded profit for the new business over the medium term.
Similarly, Old Mutual (LSE: OML) and Direct Line (LSE: DLG) also offer better value than the FTSE 100. They both have P/E ratios of 13.1 and yet are expected to increase their earnings by 17% and 11% respectively in the current year. In addition, Old Mutual currently yields an impressive 4.6% and Direct Line yields a mighty 6.6% — both are much higher than the FTSE 100’s yield of around 3.2%.
Of course, higher rates of growth are also available in the insurance sector. For example, Standard Life (LSE: SL) is expected to increase its bottom line by 18% this year, and by a further 17% next year, while RSA’s (LSE: RSA) growth rate of 59% this year and 10% next year is even more enticing. And, with these two companies having price to earnings growth (PEG) ratios of just 0.2 and 0.8 respectively, they also appear to offer growth at a reasonable price, too.
So, while the FTSE 100 may at first seem rather overvalued, there is still great value on offer – particularly in the insurance sector. Certainly, they may not be the most exciting of companies to own a slice of, but they could turn out to be among the most profitable in the medium to long term.
