Right now I’m analysing some of the most popular companies in the FTSE 100 to establish if they are attractive long-term buy and forget investments.
Today I’m looking at Aviva (LSE: AV) (NYSE: AV.US)
What is the sustainable competitive advantage?
The markets for insurance, long-term savings and fund management are highly competitive. Indeed, any company operating within these markets needs a serious competitive advantage to be able to outperform its peers.
Unfortunately, Aviva’s only stand-out advantage is it brand, which has a high level of brand recognition here within the UK.
However, competition within the market for insurance and long-term savings is cut-throat and providers are consistently trying to undercut each other. As a result, Aviva — along with the majority of its peers — lacks any real ability to set prices.
Having said that, Aviva’s larger peer Prudential has put in a strong performance during the past few years as the company’s size and international diversification have allowed it to achieve economies of scale that others cannot.
In particular, during the past two years, Aviva’s operating profit margin has averaged 1%. However, during the same period, Prudential’s operating profit margin has remained stable at 5%, indicating to me that Prudential could be a better share to buy and forget.
Company’s long-term outlook?
Aviva is currently in the process of a huge reorganisation program, designed to slash costs, improve efficiency and increase shareholder returns.
However, despite these changes I don’t not have much confidence in Aviva’s outlook.
In particular, the company’s share price has underperformed the FTSE 100 by 57% over the last 10 years as earnings have continually declined and management has missed expectations. Additionally, the company has cut its full-year dividend payout twice during the past five years alone.
Furthermore, Aviva’s net asset value per share has collapsed from a high of 737p back in 2007, to 281p during the first half of this year.
Nonetheless, Aviva could still benefit from ageing populations over the longer term. Although, as I have already mentioned, the market for long-term savings is highly competitive and peers such as Prudential and Hargreaves Lansdown, both of which have better track record than Aviva.
All in all, it would appear that Aviva’s is struggling to gain traction within a highly competitive market. The company lacks any real competitive advantage and has consistently missed targets for growth and earnings in the past.
So overall, I rate Aviva as a very poor share to buy and forget.
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In the meantime, please stay tuned for my next FTSE 100 verdict
> Rupert does not own any share mentioned in this article.
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