Should I increase my stake in Legal & General or buy great value Aviva shares instead?

Aviva shares have had a strong year, which is bad news for Harvey Jones who bought FTSE 100 rival Legal & General instead. What does he do now?

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I was on the edge of buying Aviva (LSE: AV) shares last year but ended up buying FTSE 100 rival Legal & General Group instead.

It was a close call but I plumped for Legal & General because it looked better value, as measured by its price-to-earnings ratio, while offering a superior yield of more than 8%. Also, its share price was showing greater signs of life. To be honest, neither value stock has delivered much share price growth in recent years.

So I loaded up on Legal & General and left Aviva on the shelf. As I regularly remind myself, I can’t buy ‘em all.

Tough FTSE 100 choice

And what was the point, given their similar business profiles? So I took pot luck and missed. After a bright start, Legal & General has lost its way.

The first warning shot rang out in early February, when Citi put Legal & General on a ‘negative catalyst watch’ ahead of 2023 final results. On 6 March, operating profits came in flat at £1.67bn, undershooting forecasts.

Legal & General’s general investment management suffered as customers pulled funds to seeking higher yields from cash and bonds. Its thriving bulk annuities business compensated, but not enough. It wasn’t all bad news. Management increased the dividend 5% to 20.34p per share. The share price still slumped.

I won’t be selling my stake, not with the stock yielding 8.28%. I’m looking forward to getting my second dividend on 6 June, and plenty more after that.

Sod’s law says that Aviva shares would have a better year, and sod’s law was right. Luckily, I see investing as a long-term game, so one year is neither here nor there. Okay, it’s a little bit annoying.

The Aviva share prices have climbed 13.9% over the last year and 25.82% over five years. By comparison, the Legal & General share price rose just 3.24% over 12 months. Over five years, it’s down 5.15%. Poor show.

Better value today

Despite its superior performance, Aviva shares are notably cheaper, trading at 12.81 times earnings against Legal & General’s 33.36 times. So what went right?

Basically, Aviva has been better at making money. Its full-year 2023 operating profit rose 9% to £1.47bn, beating forecasts rather than falling short. It also set a demanding new profit target of £2bn by 2026. And hiked the dividend by a generous 8% to 33.4p a share, giving a yield of 6.9%.  As well as announcing a £300m share buyback. Game, set and match, Aviva.

CEO Amanda Blanc has been working hard to cut costs, boost cash flow, and build a leaner operation. Her hard work is starting to pay off, and sooner than expected, with the company hitting its £750m cost reduction target a year early.

I think the outlook for both is promising, as they should benefit when interest rates finally start falling and investors forsake cash and bonds for high-yielding stocks like these two.

Yet today, I favour Aviva for three reasons. First, it’s on the up. Second, it’s cheaper. Third, I don’t own it. Recent performance shows that even similar companies in the same sector can perform differently at different times. I’ll buy Aviva shares when I have the funds and hope sod’s law doesn’t strike twice.

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.

Harvey Jones has positions in Legal & General Group Plc. 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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