Most of the time there is at least one unloved sector in the stock market. At the moment, the oil and mining sectors are the ones which investors are avoiding, while in the recent past banking stocks were firmly out of favour. However, while not making the headlines all that much, insurance companies are also trading on low valuations and, for long term investors, they appear to offer a superb total return opportunity.
For example, Aviva (LSE: AV) is now a dominant life insurance business following its merger with Friends Life. Considerable synergies are due to be realised from the deal and the process of tying up the two companies is on-track. However, even though Aviva is forecast to increase its bottom line by 11% next year (which is around 50% higher than the wider market’s expected growth rate) it trades on a price to earnings (P/E) ratio of just 10.6. This indicates that there is a potent combination of growth and rerating potential which is likely to propel Aviva’s share price much higher.
Similarly, Standard Life (LSE: SL) is expected to increase its bottom line by 48% this year and by a further 19% next year. Yet despite this it trades on a price to earnings growth (PEG) ratio of just 0.8, which indicates that its shares could continue the 49% rise made in the last five years. Furthermore, Standard Life also offers a yield of 4.4% and, with dividends being covered 1.3 times by profit, its shareholder payouts appear to be highly sustainable.
When it comes to dividends, though, few companies can beat Direct Line (LSE: DLG). It currently yields a whopping 5.3% and, crucially, its payout ratio is due to stand at 73% next year. This should allow the company to make sufficient investment within its business and put its finances on a firmer footing as it begins to cope with the higher insurance premium tax on car insurance, which has the potential to squeeze margins in the short run. This risk seems to be priced in, however, with Direct Line having a P/E ratio of just 13.9.
Meanwhile, Old Mutual (LSE: OML) also has significant rerating potential. It trades on a P/E ratio of only 11.3 and, with its bottom line due to rise by 10% next year, this equates to a PEG ratio of just 1.1, which is relatively low. Furthermore, Old Mutual has an excellent track record of dividend per share growth, with them having risen at an annualised rate of 19% during the last five years, which makes the company’s yield of 4.6% all the more appealing.
Hiscox (LSE: HSX) is another insurer worth buying right now, with the company having significant scope to increase dividends at a rapid rate. That’s because its payout ratio presently stands at just 38% which, even accounting for reinvestment, appears to be rather low. So, while dividends have risen by 8% per annum in the last five years, further brisk increases in shareholder payouts could be on the horizon. This, alongside a P/E ratio of 14.8, indicates that Hiscox is a strong long term buy right now.
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Peter Stephens owns shares of Aviva, DIRECT LINE INSURANCE GROUP PLC ORD 10 10/11P, Old Mutual, 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.