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

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.

Of course, valuing banks isn't easy. Several things could still go wrong for RBS, but I'm optimistic.

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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.