3 Reasons Why I Might Sell Aviva plc And Buy Royal Bank Of Scotland Group plc

Could Royal Bank of Scotland Group plc (LON:RBS) outperform Aviva plc (LON:AV) over the next few years?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Less than three years ago, in April 2012, shares in Aviva (LSE: AV) (NYSE: AV.US) were changing hands for well under 300p. I didn’t quite catch the bottom, but my purchase at 310p has turned out pretty well, netting me a 66% profit plus dividends.

I still own my Aviva shares, but I’m starting to think that future gains could be limited. As a result, I’m looking for shares which I believe could beat the market — such as Royal Bank of Scotland Group (LSE: RBS) (NYSE: RBS.US).

1. Not cheap

Although Aviva trades on a forecast P/E of only 10.8, earnings per share (eps) growth is forecast to be just 2% in 2015, whereas FTSE 100 peers Standard Life, Old Mutual and Prudential are all expected to log earnings per share growth of around 18% this year.

Despite this, Aviva shares trade at 2.5 times tangible book value — slightly ahead of peers Standard Life and Old Mutual, both of which also offer a higher dividend yield.

2. Takeover blues

Aviva’s surprise move to acquire Friends Life should generate a decent amount of extra cash flow for the firm, but Aviva seems to be paying a pretty full price for Friends Life.

Aviva’s plan seems to be to make a positive return on the deal by cutting jobs and introducing economies of scale following the takeover, but analysts don’t expect this to turbo-charge Aviva’s earnings growth.

3. A cheap, good bank?

RBS shares have risen by 35% over the last three years. However, I think there could be more to come, and on a forecast P/E of 11, the shares don’t look overly expensive to me.

RBS shares still trade slightly below their tangible book value of 388p, despite the bank’s successful attempts to strengthen its balance sheet.

What’s more, the shares are currently a whopping 30% below their full book value of 567p — providing some idea of the upside that might be possible when the bank returns to private ownership.

I expect bad debt and misconduct costs to start to fall in 2015/16, which should help lift RBS’s profitability. I also suspect that after May’s general election, the government might start to think more seriously about starting to sell its stake in RBS.

Both factors could put a rocket under RBS shares, in my view.

RBS vs Aviva

In some ways, I think the choice between the two shares is down to your requirements: income investors should stay put in Aviva, but in my view, anyone seeking a value or recovery play might want to consider switching into RBS.

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.

Roland Head owns shares in Aviva. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Affectionate Asian senior mother and daughter using smartphone together at home, smiling joyfully
Investing Articles

How I’d invest my first £20k ISA to target £4,900 a year from dividend shares

Looking for dividend shares in a new Stocks and Shares ISA, and want diversification too? Here's how I'd go about…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »