I’m pleasantly surprised at how UK insurance shares have come back from the 2020 stock market crash. I own Aviva (LSE: AV) shares myself, and I’ve often come close to buying Prudential (LSE: PRU) too. Since mid-February last year, just before the crash kicked in, the Aviva share price is down just 2%. The Prudential share price, meanwhile, is up 4%. I rate those as pretty respectable performances considering what we’ve been through.
I’ve always considered the insurance business resilient over the long term, if volatile over short periods, and often cyclical too. And I’ve almost always had one or two insurance stocks tucked away among my long-term investments. But in Aviva, have I picked the wrong one? The insurance giant has been facing reorganisation pressures, and the share price has stagnated. Over the past five years, Aviva shares are down 4%.
Bigger Prudential share price gains
The Prudential share price has climbed 40% over the same period, which is clearly a better result. Still, I have been getting my Aviva dividends. The 2019 Aviva dividend was cut by the Covid-19 pandemic and the FCA’s instruction to hold back the cash. But for 2020, the company has announced a 21p dividend, for a 5.2% yield on the current Aviva share price.
Prudential, meanwhile, has been paying a lower dividend, typically around 2.5% per year. So we’re looking at better dividends from Aviva, against a superior Prudential share price performance. I’m happy with my choice of Aviva, but I’m seriously thinking of adding Prudential shares to my ISA.
There’s one thing I particularly like about Prudential, and that’s its changing international approach. The company, like others in the sector, is undergoing a restructuring and refocusing process, which should open it up more to the Asian market. That’s where many of the world’s developing economies are, and with growing wealth comes increasing demand for insurance products.
New focus risky?
Are there risks there too? Well, yes. As my Motley Fool colleague Andy Ross has pointed out, the new Asia focus could result in less diversification than before. And the quest for Asian growth could come at a cost to the dividend, which is already modest. Hopefully, we’ll see Prudential share price growth to compensate, but that’s by no means certain yet.
What about Aviva? We still don’t have the full picture of how the company’s restructuring will turn out, though there are improvements. Costs are looking better controlled and the firm’s balance sheet is healthier than it has been. But investors are increasingly focused on liquidity in the financial sector, and might want to wait until we’re past the current uncertainties before deciding whether to buy.
Share prices to level off?
We might also see a bit of profit-taking with both of these companies. Some investors will have bought during the 2020 crash to try to make a quick profit from any recovery. Since last year’s low point, the Aviva share price is up 80%. The Prudential share price, meanwhile, has more than doubled. So the temptation to sell is there
I think we might see some share price weakness in the coming months. But with an investing horizon of five years or more, I’d be happy to count both among my investments.
