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Prudential plc Is Flying, So Why Would I Buy Aviva plc Instead?

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It’s always the dilemma. Do you go for the momentum play – the company that keeps rising and rising without end, or do you invest in a contrarian play – a business which has plumbed the depths but which is steadily recovering?

Momentum investors say that you should always buy into winners, and an increasing share price is a clear sign that the firm is progressing well. And famed growth investors such as Jim Slater always say that you should run your winners and sell your losers.

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On the other hand, contrarian investors such as Warren Buffett say that you should buy into companies when they are unloved and oversold, and avoid businesses that have already had a strong run. After all, what goes up must come down, and what comes down hopefully will go up.

In investing, as in anything else, you take the path you choose, and you just make it work.


Prudential (LSE: PRU) is one of the most successful insurance companies in the world. At the time of the Credit Crunch it seemed to be in trouble. The AIA takeover fell through, and people worried that it had lost its way. But by focussing on the growth markets of Asia it has found a new direction. It is now a leading provider of life insurance in Hong Kong, India, Indonesia, Malaysia, Singapore, the Philippines and Vietnam.

These are all markets which are set to keep on growing. And the recovery in earnings show the growth coming through to the bottom line. Here are the eps numbers:

2012: 85.00p

2013: 52.70p

2014: 86.80p

2015: 110.14p

2016: 124.35p

The downside is that the share price has already rocketed, increasing an amazing 10-fold since the dark days of 2008. But rising earnings mean the fundamentals are not expensive, with a 2015 P/E of 14.54, and a 2016 P/E ratio of 12.88, with dividend yields of 2.40% and 2.56%.

However, the question you have to ask is whether this firm can maintain this rate of earnings growth. Standard Chartered was another emerging markets darling which eventually reached the limits of its growth. Could the same thing happen with Prudential?


In contrast, Aviva (LSE: AV) is more of a ‘slow and steady as she goes’ type of company. Its main markets are the UK, Canada, China and South-East Asia. I happen to own car insurance from Aviva; I love the simplicity and ease of use of the insurance it provides.

The firm had a dreadful time during the depths of the Eurozone crisis, turning a loss and undergoing a severe restructuring. But Aviva has emerged a stronger and more profitable company. And earnings per share have recovered every bit as rapidly as Prudential:

2012: -11.20p

2013: 21.80p

2014: 47.70p

2015: 47.94p

2016: 52.46p

What’s more, the company is cheaper, with a 2015 P/E ratio of 10.75, and a 2016 P/E ratio of 9.83, and dividend yields of 4.04% and 4.92%.

Foolish conclusion

Overall, I think both firms are worthy buys, and it all depends upon whether you prefer growth shares or income investments. It’s difficult to make my pick, but Prudential has already risen a lot, so I’ll take the tortoise over the hare. My contrarian instincts just give Aviva the edge.

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Prabhat Sakya has no position in any shares mentioned. 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.

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