A FTSE 250 stock I’d buy to complement the Aviva share price

The Aviva plc (LON: AV) share price looks cheap to me, but so does this FTSE 250 (INDEXFTSE: MCX) prospect.

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Insurance can be cyclical, but it’s one of my favourite sectors. Today, I’m looking at Beazley (LSE: BEZ). The FTSE 250 constituent specialises in large-scale catastrophic events rather than run-of-the-mill retail insurance. That, of course, means profits are likely to be more erratic — though claims payouts should be less frequent, some of them will be seriously big.

As my colleague Roland Head pointed out, 2018 was a tough year, stung by US hurricanes, Californian wildfires and typhoons in Japan. Pre-tax profit fell to $76.4m, down 75% from the $293m recorded just two years prior in 2016.

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But if that’s what happens during a year of insurance carnage, I think it says good things about the firm’s prospects in years with fewer disasters. Analysts see pre-tax profit bouncing back this year to a mooted figure of $226m, with a further jump to $303m in 2020.

Ahead of forecasts

It looks to me as if Beazley could end up beating those forecasts nicely. The first half of 2019 has already brought in pre-tax profit of $166m (way up from 2018’s $57.5m), with the firm’s return on equity recovering to a respectable 19% (from last year’s 6%). Gross written premiums are alsoup 12% to $1.4bn.

Something I like about Beazley is its dividends. Yields are only in the 2-3% range, but the payouts have been maintained — even last year when it wasn’t covered by temporarily depressed earnings. The 2019 interim dividend has been raised 5% to 4.1p, and the same in the second half would provide a yield of around 2.2%.

On a P/E dropping to 11.5 on 2020 forecasts, I see Beazley as a solid long-term investment.

Top insurers

I think the selection of Boris Johnson as the UK’s new PM can only make things worse for our financial sector, as just about every economics and business body seems to see a no-deal Brexit as likely to crush the UK’s economy.

Saying that, the Aviva (LSE: AV) share price hasn’t suffered any fall on the news just yet, at least not in sterling terms (though the pound continues its decline).

Aviva is my FTSE 100 insurance choice at the moment, and the more I look at it the more I’m convinced the shares are an oversold bargain. A 20% price fall over the past two years has dropped Aviva’s forecast P/E multiples down around seven, which is approximately half the Footsie’s long-term average. It’s also pushed the expected dividend yield up to 7.7%, and that would be almost twice covered by earnings — which looks very solid to me.

Top dividend

In fact, the more I re-examine Aviva, the more I’m convinced it’s one of the FTSE 100’s best dividend stocks right now. And I firmly agree with Royston Wild on his assessment of five top reasons why investors are likely to continue to receive a top income stream from the stock.

And, though Aviva has bounced back to cashflow health after overstretching itself leading up to the financial crunch, it’s not sitting on its laurels. Under the leadership of new boss Maurice Tulloch, the company is continuing to reduce debt and keep costs under control… you know, the things a company should be doing all the time to prevent future overheating.

I’m keeping my Aviva shares, and I might even buy some more.

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Alan Oscroft 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.

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