Why I think the Aviva share price could be the FTSE 100’s biggest bargain

Roland Head explains why he’s been buying FTSE 100 (INDEXFTSE: UKX) faller Aviva plc (LON: AV).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

When I talk about FTSE 100 stocks and bargains, I usually mean companies that look cheap relative to their assets and have the potential to pay generous, ongoing dividends.

Today I want to look at two FTSE companies which I believe fit this description. First up is insurance giant Aviva (LSE: AV).

Shares in this firm are worth about 20% less than they were one year ago. Why is this? I’m not sure. Last year’s results showed rising profits, a dividend increase, and stable finances. More of the same is expected in 2019. As I’ll explain, I think Aviva offers good value.

Not perfect

Things aren’t perfect, of course. The company recently spent six months without a chief executive. New boss Maurice Tulloch seems to be planning some changes, but we don’t yet know what they are. So there’s uncertainty about the company’s strategy.

A second concern is that Aviva’s profitability and growth rate have been lower than those of some rivals in recent years. After-tax profits only rose by 2% last year, and the firm’s return on shareholder’s equity of 14% was significantly lower than rivals such as Prudential (25%) and Legal & General (22.7%).

I’m still a buyer

Although Aviva has lagged the top-performing firms in its sector, the group’s performance is not bad, in my view. Cash generation has been especially good and the dividend has grown steadily.

I think the issues I’ve discussed are already reflected in the share price. At about 400p, AV shares are trading below their book value of 424p per share and on a 2019 forecast price/earnings ratio of just 6.7.

This year’s expected dividend of 32.2p per share looks affordable to me and gives a 7.9% yield. I rate the shares as a buy and remain a happy shareholder.

Digging deep

My second pick is mining and commodity trading group Glencore (LSE: GLEN). Like Aviva, it looks cheap compared to peers and has a strong track record of cash generation and dividends.

However, there are some risks.

One concern is that Glencore is currently the subject of a US Department of Justice investigation into alleged corruption. This could result in a costly financial penalty at some point — we don’t really know.

Eco worries

I think a bigger concern is how the group will address environmental and corporate governance concerns. As one of the world’s largest producers of the thermal coal used in power stations, the business is still heavily involved in a sector that some rivals are now avoiding.

The group’s mining operations in countries such as the Democratic Republic of Congo are also seen as much riskier than mines in developed markets such as Australia.

These are valid concerns, but I don’t think they’re deal-breakers. The coal business could be sold if necessary, and Glencore’s copper and cobalt mines in Africa look well positioned to profit from the shift to electric power.

In the meantime, the company’s commodity trading business proved to be a reliable source of profits during the 2015/16 mining crash.

Glencore stock now trades in line with its book value and on a forecast price/earnings ratio of about 10. Analysts expect a dividend of $0.19 per share this year, giving a yield of 5.8%. I think GLEN stock could be a buy at current levels.

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.

Roland Head owns shares of Aviva. 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.

More on Investing Articles

Investing Articles

2 powerful passive income stocks investors should consider snapping up

Building a passive income stream via dividend-paying stocks is possible, according to our writer, who details two picks to take…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing For Beginners

This UK stock has gained 42% since I bought it, but I think it’s still a bargain

Jon Smith outlines his reasons for thinking that a UK stock he owns has the potential to keep rallying for…

Read more »

Investing Articles

1 under-the-radar value stock I’m eyeing up for returns and growth

This Fool is looking for quality stocks at bargain prices and reckons this potentially overlooked value stock could be a…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

National Grid shares have plunged — but if I’d bought 2 years ago, would I be in profit?

National Grid shares are about 22% lower than in May, but that may just be a small blip for long-term…

Read more »

Investing Articles

This FTSE 250 stock looks unmissable — but buying shares now could be a mistake for me!

It’s tough when a stock looks fundamentally sound, but there’s a cloud hanging over it. This is what’s happening with…

Read more »

A Black father and daughter having breakfast at hotel restaurant
Investing Articles

Raspberry Pi shares are piping hot! Should I invest right now?

Raspberry Pi shares are certainly bearing fruit for those lucky enough to have invested early. Have I missed the boat…

Read more »

Dividend Shares

How much passive income from stocks could I make with a £37k salary?

Jon Smith takes a look at how much passive income he could make by squeezing all the juice out of…

Read more »

Young female analyst working at her desk in the office
Investing Articles

The Ashtead share price falls on FY results. Is it a good long-term buy?

High interest rates are bad for companies with high debt, especially if it's growing. But the effect on the Ashtead…

Read more »