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Aviva plc Is A Punt, Prudential plc Is A Dead Cert

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Betting analogies aren’t really appropriate for serious, long-term investors. But calling Aviva (LSE: AV) (NYSE: AV.US) a punt and Prudential (LSE: PRU) (NYSE: PUK.US) a dead cert is a good way of emphasising the different investment characteristics of the two firms.

Aviva is the composite insurer favoured by value investors that has serially disappointed, to the extent many consider it a value trap. Shareholders were particularly hurt by last March’s dividend cut, which knocked 15% off the share price.

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The cut wasn’t completely unexpected, with a new CEO, an implausibly high yield and excessive gearing. But chairman John McFarlane had made great strides selling assets and paring costs after he seized the reins in the wake of disgraced former CEO’s departure, and had told investors he was striving to maintain the payout. It was bad signalling, if shrewd strategy, to do a volte face.

A split?

New CEO Mark Wilson’s strategy looks much like that set by Mr McFarlane with assets sales, cost cutting and cash generation prioritised. One intriguing difference is that Mr Wilson is eliminating the internal funding that the general insurance arm provides to the life assurance arm. Aviva has previously defended its composite structure by citing just that cash flow benefit. Maybe Mr Wilson has an eye on divesting the general insurance arm once the operational management is sorted out: now that would see value outed and put in the pockets of Aviva’s investors.

In any case, shareholders will need patience. Aviva has great brands and a significant franchise, but the value has been squandered on poor management. Streamlining operations and focussing on more profitable business units is starting to show through in better cash flow, reduced gearing and improved margins. But it will be a long haul with much of Aviva’s business in hock to the sick economies of Europe.

That’s not a problem at life assurer Prudential, which gets 40% of its new business from Asia. Its plan to buy AIG’s Asian arm was rejected by shareholders in 2010, but with a decades-long presence in the region it has plugged away at growing its position there. It’s pushing against an open door: as Asia’s middle classes grow in number and disposable income, so they are more interested in products such as life assurance. I suppose there are similar disparities between poor and middle class families in the UK.

Odds

Prudential’s 14.1 prospective P/E is nearly 20% higher than Aviva’s 11.9, and you get just a 2.8% dividend against Aviva’s 4.1%. But you’d expect a dead cert and a punt to offer different odds.

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> Tony owns shares in Aviva and Prudential but no other shares mentioned in this article.

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