For investors in Aviva (LSE: AV) (NYSE: AV.US), IAG (LSE: IAG) and Next (LSE: NXT), things seem to be on the up. For example, Aviva has recently taken over Friends Life, which makes it a dominant force in the life insurance marketplace and the deal is set to deliver considerable synergies that should allow for an impressive rate of dividend growth moving forward.
Similarly, IAG is benefitting from an improving economy, with more passengers trading up from budget airlines as price becomes less of a focus. And, with the price of oil remaining well below $100 per barrel, IAG’s cost base is more appealing than it was one year ago. Meanwhile, a rise in disposable incomes in real terms for the first time since the start of the credit crunch should provide a boost in profitability for Next, which continues to be a very resilient and cash-rich stock.
However, Aviva has the greatest appeal of the three stocks, in my view. That’s because it offers the perfect mix of growth, income and value, while IAG and Next fall short in at least one of those three key areas.
For example, Aviva currently yields a hugely impressive 4.1% and, better still, is expected to increase dividends per share by 17% next year and this puts it on a forward yield of 4.7%. That’s considerably higher than the yield on the FTSE 100 of 3.5%, and also comfortably beats the dividends on offer at IAG and Next. In fact, IAG yields just 2.1% after deciding to recommence the payment of dividends this year, while Next has a yield of just 2.2% at the present time. With interest rates set to remain low over the medium term, such a strong yield and impressive dividend growth could increase investor sentiment in Aviva.
Similarly, Aviva also has the lowest valuation. It trades on a price to earnings (P/E) ratio of just 10.7, which is well below the P/E ratios of IAG (18.4) and Next (17.9). This indicates that Aviva is the most likely to be the subject of an upward rerating over the medium term — especially with it being forecast to grow its bottom line by 12% next year. Certainly, this may be lower than IAG’s expected growth rate of 19%, but Aviva’s valuation appears to take this into account. Meanwhile, Next is expected to grow its net profit by just 6% next year, which is roughly in-line with the wider index’s growth rate.
While IAG and Next are both high quality stocks with bright futures, Aviva appears to offer greater appeal. Certainly, it may not be considered by many investors as a company capable of surging ten-fold over the long run. However, with its shares having increased by more than three times in the last six years, it appears to be well on its way to delivering superb share price growth.
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Peter Stephens owns shares of 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.