Why the Aviva share price and 7.5% dividend yield may make it the bargain of the FTSE 100

G A Chester discusses the investment appeal of out-of-favour FTSE 100 (INDEXFTSE:UKX) giant Aviva plc (LON:AV) and a smaller company with news today.

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The Aviva (LSE: AV) share price is currently at a new 52-week low of 414p. This is a 25% fall from its summer high of 552p. Of course, the FTSE 100 insurance giant isn’t the only out-of-favour stock in the market today. The share price of household goods firm McBride (LSE: MCB), which released a trading update ahead of its AGM this morning, is currently 4% lower on the day at 133p. This takes its decline to 43% below its 52-week high of 232p.

Buying the right stocks when they’re unloved by the market can lead to handsome rewards for investors. I reckon Aviva and McBride are both oversold and I see them as good contrarian buys today.

Competitive advantage

McBride is the leading European manufacturer and supplier of contract manufactured and private label products for the domestic household and commercial cleaning markets. The company has faced a challenging backdrop over the last year or so. And it said today that this has continued in the three months since its last financial year-end of 30 June.

Raw material, packaging and logistics costs were slightly higher than anticipated, but were mitigated by improved sales volumes and lower overheads. The company’s scale gives it a competitive advantage in the current challenging costs environment. This has seen some competitors go bust. Meanwhile, McBride said today: “The group is strongly positioned to exploit further growth and margin opportunities in the coming year and beyond.”

Bargain basement

At the current share price, the company trades on a trailing 12-month price-to-earnings (P/E) ratio of 10.5, and this falls into the bargain basement of single digits (9.2) on forecast 12-month earnings growth of 14%. The resultant price-to-earnings growth (PEG) ratio of 0.75 is also highly attractive, because it’s well to the good value side of the PEG fair value marker of one. Finally, a prospective dividend yield of 3.5% looks rock solid, with the payout being covered over three times by forecast earnings.

Pause for thought

Aviva’s metrics are even deeper into value territory. Its trailing 12-month P/E  is 7.4 and this falls to just 6.7 on forecast 12-month earnings growth of 11%. The PEG ratio is 0.6, and the dividend yield is a whopping 7.5% (covered a healthy two times by forecast earnings).

When a P/E is as low as Aviva’s and a dividend yield as high (among the best ‘bargain’ metrics in the FTSE 100), it should give us pause for thought. Regulatory scrutiny of lifetime mortgage products and the announcement of the departure of Aviva’s chief executive earlier this month are unlikely to have helped sentiment, but I don’t see these things as justifying such a low valuation for the company.

Footsie bargain

Of course, as with big banks, you really need to be an expert on the complexities of large-scale, multi-line insurers like Aviva to spot any hidden risks in the business, or nasties in the accounts. However, I take comfort from the fact that financial data website DigitalLook has no City broker out of 19 recommending the stock as a sell.

Moreover, shrewd hedge funds that are adept at unearthing problem companies and shorting their stock, appear to be uninterested in Aviva. Certainly, there are no short positions above the disclosable threshold of 0.5%. All in all, I think Aviva might just be the bargain of the FTSE 100.

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.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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