MENU

Aviva plc vs Banco Santander SA: Which Finance Stock Should You Buy?

2015 has thus far seen a marked contrast in the fortunes of investors in Aviva (LSE: AV) (NYSE: AV.US) and Santander (LSE: BNC) (NYSE: SAN.US). That’s because their share prices have quickly travelled in very different directions, with Aviva surging by 10% year-to-date and Santander tumbling by 17% since the turn of the year.

Looking ahead, will this differing performance continue? Or, is Santander now a much better buy than Aviva following their 27% difference in share price performance over the last six weeks?

Sentiment

While investor sentiment in Aviva has surged recently as the market looks ahead to considerable synergies from the deal to acquire Friends Life for £5.6bn, Santander’s €7.5bn placing has sent investor sentiment into reverse. However, this seems to be a somewhat unfair reaction to what is simply a strengthening of the bank’s balance sheet to allow it to maintain its regional diversity and take advantage of potential growth opportunities in future.

Therefore, it is likely that sentiment in Santander will pick up over the medium term, while the challenges faced by Aviva in integrating what is a very sizeable business in Friends Life could cause the market’s view of the company to moderate somewhat.

Valuation

Despite their differing share price movements in recent weeks, Aviva still offers better value for money than Santander. For example, it has a price to earnings (P/E) ratio of 11.3, which is lower than Santander’s P/E ratio of 12.8. Certainly, both valuations are relatively appealing while the FTSE 100 has a P/E ratio of around 15.9, but they show that Aviva’s share price may be more inclined to move higher as there is greater scope for an upward adjustment to its rating.

Income Prospects

Although Santander paid out a dividend that equated to a yield of over 6.5% last year (before its recent share price fall), it has more than halved its dividend so as to put itself on a firmer financial footing. As such, it now yields a lower (but still appealing) 3.9%. This is exactly the same yield as is currently offered by Aviva, although the insurance company is expected to increase its shareholder payouts by a whopping 22% in 2016, which means that it could be yielding as much as 4.7% next year.

And, while Santander is due to yield 4.1% next year, Aviva seems to have the upper hand on income prospects and this could cause its shares to become more in-demand – especially if the Bank of England does keep interest rates on hold this year.

Looking Ahead

With a more appealing valuation, better income prospects, and stronger investor sentiment, Aviva seems to be a better buy than what is an already appealing Santander at the present time. Certainly, the acquisition of Friends Life could cause short term challenges but, in the long run, it seems to be an excellent buy and could make a real difference to your portfolio returns in 2015 and beyond.

Of course, Aviva isn't the only stock worth buying at the present time. In fact, the analysts at The Motley Fool have put together a free and without obligation guide called 5 Shares You Can Retire On.

The 5 companies in question offer a potent mix of dependable dividends, stunning growth prospects, and trade at super-low valuations. As such, they could boost your returns and make retirement come along a lot sooner than you currently realise!

Click here to find out all about them - it's completely free and without obligation to do so.

Peter Stephens owns shares of Aviva and Friends Life. 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.