The share price performances of Aviva (LSE: AV) (NYSE: AV.US) and Standard Chartered (LSE: STAN) over the last year have been rather disappointing. Certainly, the FTSE 100 has not exactly set the world alight with its fall of 1%, but Aviva has fallen by 1.5% and Standard Chartered has tumbled by 18% over the same time period.
Looking ahead, though, the two companies are set to post much better returns and a key part of that is clear catalysts for a shift in investor sentiment. In Aviva’s case this is centred around its decision to merge with Friends Life at a cost of around £5.6bn. The merged entity is likely to dominate the life insurance market and deliver significant synergies which, over the medium to long term, should allow Aviva’s profitability to grow at a relatively appealing rate.
The deal also means that Aviva’s dividends are better secured, as improved cash flow and more consistent performance should allow the company to post rapid dividend rises. And, with Aviva’s payout ratio currently standing at just 46%, there is vast scope for dividends to rise at a faster rate than net profit over the medium term, while still ensuring that Aviva retains enough cash to reinvest in its future growth prospects.
For Standard Chartered, the potentially positive catalyst is equally strong. Its management structure has been shaken up, with a new CEO and new Chairman, while the number of board members has been cut so as to provide a more streamlined and efficient decision-making process.
Of course, the new management team will take time to full effect its strategy and, as is often the case with a new strategy, it can take time to have a major impact on the company’s bottom line. However, investor sentiment could move sharply upwards if the market buys in to Standard Chartered’s revised long term growth plan.
Despite having excellent prospects for long term growth, both Aviva and Standard Chartered are exceptionally cheap at the present time. For example, they trade on price to earnings (P/E) ratios of just 11 (Aviva) and 11.7 (Standard Chartered) which, while the FTSE 100 has a P/E ratio closer to 16, indicate that both stocks could be the subject of upward reratings over the medium term.
Furthermore, when the two companies’ ratings are combined with their double-digit growth rates for next year, they equate to price to earnings growth (PEG) ratios of just 0.8 apiece. This indicates that, as well as being, cheap, Aviva and Standard Chartered both offer growth at a very reasonable price and, while their performance in the last year has been somewhat disappointing, their respective catalysts appear to be sufficient to allow them to post superb capital gains over the medium to long term.