Were You Right To Sell Aviva plc And Buy Tullow Oil plc?

Aviva (LSE: AV) (NYSE: AV.US) shares have risen by 70% over the last two years, while Tullow Oil (LSE: TLW) has fallen by 75%.

By selling Aviva and buying Tullow, you could lock in a big profit on the insurer, and position yourself for a rebound in the value of one of the UK’s most successful oil explorers — right?

Based on broker TD Direct’s latest list of most traded stocks, on which Aviva features as a sell and Tullow as a buy, many of you did choose to make this trade last week.

Let’s take a closer look.

Tullow Oil

Tullow shares have fallen by 80% from their 2012 peak of 1,566p. Is this enough to make the ex-FTSE 100 oil firm a bargain buy?

I had previously considered buying Tullow shares when they fell below 350p, which until recently was the firm’s book price.

However, $2.2bn of write-downs in last year’s results knocked Tullow’s book value down to around 280p, and I’m glad I stayed away.

Things aren’t much better in the profit department. Consensus forecasts suggest earnings per share of $0.19 in 2015, giving a pricey forecast P/E of 24. This is expected to fall to a P/E of 20 in 2016, as earnings rise to $0.23 per share.

A final concern is that Tullow’s net debt rose by 63% to $3.1bn last year. I expect net debt to rise further in 2015, as Tullow’s capital expenditure is likely to exceed cash flow from operations, again.

Tullow isn’t cheap enough for me, yet — the firm’s large debt burden means that things could get much worse before they improve, in my view.


Since Mark Wilson took over as chief executive at Aviva, the firm’s recovery seems to have gone from strength to strength.

Earnings per share doubled in 2014, and the dividend has risen by 20% to 18.1p, giving a reasonable 3.3% yield. Of course, if you bought your Aviva shares at a lower price, your yield on cost would be much higher — 18.1p on a share price of 400p gives a 4.5% yield.

On the other hand, Aviva’s recent agreement to buy Friends Life Group doesn’t look especially cheap. The deal should improve Aviva’s cash flow, but I don’t think Aviva is likely to make a big profit from Friends Life’s assets.

Aviva now trades on 11 times 2015 forecast earnings, with a 3.8% prospective yield. I expect the share price to flatten out from now on, so this could be a good time to lock in a capital gain — but I believe there’s more to come for income investors.

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Roland Head owns shares in Aviva. The Motley Fool UK has recommended Tullow Oil. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.