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Why I’d Buy Aviva plc Before RSA Insurance Group plc And Standard Life Plc

Shares in Aviva (LSE: AV) (NYSE: AV.US) have disappointed somewhat thus far in 2015, with them being up just 4% despite the company’s improving financial performance. Of course, that’s still ahead of the FTSE 100’s performance but, with the Friends Life merger being relatively well received by the market due to its potential for considerable synergies, it is somewhat surprising that Aviva’s share price has not powered ahead.

Dividends

Having slashed dividends in 2013 by around 50%, Aviva has not been as appealing as an income play in recent years. However, that looks set to change, with the new and expanded Aviva due to see significant improvements to its cash flow that mean dividends per share could increase substantially.

Furthermore, Aviva’s improved profitability over the last couple of years has meant that its dividend payout ratio has now slipped back to just 44%. Although not ultra-low, there is considerable scope for a rise in the company’s payout ratio, which means that dividends per share should increase at a rapid rate over the medium term.

Still, Aviva offers a superior yield to two of its insurance sector peers. For example, Aviva is expected to yield as much as 4.8% next year, while the likes of RSA (LSE: RSA) and Standard Life (LSE: SL) are forecast to yield 3.4% and 4.5% respectively next year. As such, investor sentiment in Aviva could improve over the next few years, as a relatively high yield and the scope for dividend increases sets it apart from other options within the insurance space.

Growth Potential

While Aviva is still on the road to recovery following a disappointing period that saw it make a loss in 2012, it is making excellent progress and has the scope to deliver strong growth moving forward. This is especially the case since Aviva is forecast to become the dominant player in the life insurance market with 16m customers, and is also set to deliver £225m in synergies per annum following the merger. Furthermore, the addition of Friends Life to Aviva should increase the company’s cash flow by an extra £600m per annum, thereby putting it on an even stronger financial footing.

Valuation

Despite its appealing growth prospects, Aviva continues to trade at a large discount to the wider index, and also to RSA and Standard Life. For example, Aviva has a price to earnings (P/E) ratio of just 10.8, which is much lower than the FTSE 100’s P/E ratio of around 15.5. It is also more appealing that RSA’s P/E ratio of 14.5 and Standard Life’s P/E ratio of 17.8.

Looking Ahead

Of course, both RSA and Standard Life also have bright futures. For example, RSA is in the midst of a turnaround plan that is seeing it rationalise its business so that it becomes more efficient, leaner and more profitable over the medium to long term. Likewise, Standard Life remains a hugely appealing stock, with its bottom line set to rise by 19% next year and it seemingly offering growth at a very reasonable price.

However, when it comes to the mix of growth, income and value, Aviva appears to be the best combination play at the moment. And, with the £5.6bn merger with Friends Life set to create an even more dominant business, now seems to be the perfect time to buy a slice of Aviva.

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Peter Stephens owns shares of Aviva, RSA Insurance Group, and Standard 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.