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Why I Would Sell BP plc & Buy Aviva plc

With the FTSE 100 plumbing the depths at the moment and a general malaise in equity markets around the world, there is no better time to go shopping for shares. As they say, be greedy when others are fearful, and fearful when others are greedy. But which of the big, blue-chip names would you buy?

BP

BP (LSE: BP) is a stalwart of many a pension fund and investment manager. But look at any chart of this oil major’s share price performance, and you will see over the past six months a valuation which has just fallen and fallen.

What is the reason for this sliding share price? Well, look no further than the tumbling oil price, which is less than half of what it was a year ago.

But, I hear you say, surely the share price is near bottoming now, and this is really the time to buy? Well, analyse the fundamentals and you will see why this is completely the wrong viewpoint to take.

The earnings per share progression indicates that there may be trouble ahead:

  • 2012: 35.37p
  • 2013: 74.66p
  • 2014: 13.12p
  • 2015: 23.12p
  • 2016: 26.49p

Even if earnings targets are met, BP is making a lot less money than it used to during the height of the oil boom. Even after the share price has fallen so much, the predicted 2015 P/E ratio is a pricey 14.40, and the 2016 P/E ratio is a (probably over-optimistic) 12.58.

A saving grace is the dividend yield, which is estimated to be a whopping 7.76%. So BP may just be a high-yield play; but with the oil price likely to remain low for a long time, I expect this to be cut. With cyclical shares such as this, the trend is the important thing. This is a company whose share price is on a strong down trend — to me, it’s one to avoid.

Aviva

In contrast to BP, Aviva (LSE: AV) is in a business that is far less cyclical: insurance. It may not have had a Deepwater Horizon to deal with, but it has had troubles of its own.

A legacy of tired and out-dated brands has been over-hauled by chief executives Andrew Moss and Mark Wilson, and the company is building upon its strengths in the UK, Canada, and a range of emerging markets such as India, Poland and Vietnam.

This once loss-making company has been turned around. Just see how earnings have bounced back:

  • 2012: -11.20p
  • 2013: 21.80p
  • 2014: 47.70p
  • 2015: 46.34p
  • 2016: 51.14p

Instead of being a firm with declining income, profitability is increasing. Yet the fundamentals look cheap. A 2015 P/E ratio of 9.78 falls to just 8.87 in 2016. This looks like a bargain to me. And the dividend yield of 4.81%, rising to 5.69%, looks far more secure than that of BP. So Aviva is both a dividend investment, and a play on emerging market growth.

If you are selling your BP shares, then Aviva is one of the companies I would buy into.

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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.