How much do you value your savings? Personally, I think mine are worth more than the 0.88% I would get from the average variable rate cash ISA. This is why I invest my longer-term savings in the stock market, where you can grab yields of 6% or more from top blue-chip companies, with any share price growth on top.
La vida Aviva
FTSE 100 insurer Aviva (LSE: AV) currently offers a stonking forecast yield of 6.7%, generously covered twice by earnings. That is serious income, although experienced investors will tell you that high yields can often signal underlying worries.
Aviva’s share price has fallen 17% in the last three months, partly because, as Rupert Hargreaves explains here, it has been hit by the regulatory threat to one of its major products, equity release lifetime mortgages. Aviva could be forced to hold more capital to safeguard against these risks, and that could imperil its dividend.
Once in a lifetime
That is a concern but Aviva is already well capitalised and the threat has partly been priced in. The group now trades at just 7.5 times forecast earnings, well below the 15 times that is seen as fair value. It has been growing strongly too, with earnings per share (EPS) up 129% in 2017 and forecast to rise another 65% this year, then 8% in 2019. By then, the yield is forecast to hit 7.5%.
There are other threats, as there always will be to a business of this size. Another severe winter could hit profits while rival Prudential has greater exposure to fast-growing Asian markets.
Aviva’s long-term share price performance has been disappointing, it still trades at the same level it did five years ago. However, I still think current share price weakness may be a buying opportunity, given the juicy dividend. If you don’t agree, there’s always that cash ISA.
The Brothers
Or you might want to look another financials company, such as asset manager Rathbone Brothers (LSE: RAT), which published a trading update this morning showing funds under management increased to £47.3bn in Q3 following its acquisition of Speirs & Jeffrey.
This added £6.7bn to its funds and chief executive Philip Howell said the resulting increase in scale “places us in a strong position to continue to improve our service to clients and, mindful of recent volatility in investment markets, to maintain our disciplined investment in the business”.
Asset growth
Stock market volatility always hits fund managers and the Rathbone share price is trading 10% lower than a year ago, although it is still up 50% measured over five. Excluding the acquisition, total funds under management still rose 1.8% in Q3, against a 1.7% drop in the FTSE 100. This was an annualised rate of 2.8%, marking a slowdown from 3.5% in 2017.
Rathbone remains a steady business in these volatile times, posting double-digit EPS growth for each of the last five years. Growth is forecast to slow to 4% this year then rise 11% in 2019. It is fully valued at 15.9 times earnings, and the yield is unexciting at 2.8%, although cover of 2.2 gives scope for progression. The group’s pedigree stretches back to the 1720s and it’s one to consider in the next market meltdown.
