Better buy for September: Aviva (LSE:AV) or Rolls-Royce (LSE:RR)?

Both Aviva and Rolls-Royce shares have had a turbulent 2020 and 2021. Both companies are trying to turn things around for shareholders, but which one would I buy for September 2021?

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Rolls-Royce (LSE:RR) and Aviva (LSE:AV) are FTSE 100 members that are popular investments. Which is the better buy for my portfolio in September?

Will Rolls-Royce shares fly?

The coronavirus pandemic hurt Rolls-Royce. The company makes the bulk of its revenues from selling and servicing jet engines, and that revenue evaporated last year. Although more planes are flying today, estimates range from next year to 2035 for when air travel will recover completely. Rolls-Royce engines find themselves in wide-body planes, with a narrow-body offering coming in 2030. It seems likely that short-haul travel will recover faster than long-haul which does not benefit Rolls-Royce.

During the pandemic, Rolls-Royce raised billions in equity and debt and cut its dividend to shore up its balance sheet. It has cut its workforce and cost base, focused on efficiency, and sold some businesses to raise cash. Things might be starting to turn around. Jets are flying again, and the company’s defence and power segments are performing well. Rolls-Royce made an operating profit of £307m in the first half of 2021. That is better than the £1,630m loss reported a year ago.

But, what would a turnaround for Rolls-Royce look like? In my last article on the company, I wrote that I was concerned that a return to pre-pandemic performance is not really a win for Rolls-Royce investors. Operating and gross margins had declined since 2015, as had the Rolls-Royce share price and the dividend. The company has turned a profit twice since 2015. A return to that kind of form is not something I could get excited about.

Can Aviva reassure investors?

The Aviva share price had been declining since 2017 before the pandemic knocked it for six and forced a dividend cut. Revenues fell sharply in the first half of 2020 at Aviva before recovering by the year’s end. Although they have dipped again in the first six months of 2021, investors don’t seem to have noticed.

That might have something to do with the £4bn payout they have been told to expect to receive by the end of next year. That will start with an immediate £750m share buyback. The cash has come from the selling of non-core businesses. The disposal spree started in the middle of 2020 and, eight sales later, finished up in March of this year.

Aviva shareholders like their dividends. Growing the dividend over time will keep them on board. Selling non-core businesses and using the proceeds to reduce the share count is a smart move. It means the absolute cash dividend expense can fall, while the dividend per share can actually rise. Aviva expects its dividend to grow in the low to mid-single digits. Special dividends have been hinted at if there is capital to spare above certain regulatory limits and debt reductions remain on track. But, that does depend on the refocused, smaller, and perhaps less diversified Aviva performing as well as expected.

I think Aviva is the better buy for September 2021. The dividend yield is around 5%, there is support for the share price from the buybacks, and the company has completed its turnaround plans. Aviva has trimmed down and refocused on its more profitable markets. I think Rolls-Royce, on the other hand, needs a complete overhaul, which will be more uncertain and longer-term than for Aviva. 

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.

James J. McCombie owns shares in 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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