Why Are Aviva plc, BAE Systems plc And HSBC Holdings plc So Cheap?

Trading at 485p, shares in insurance giant Aviva (LSE: AV) are on a forward P/E of under 11 based on full-year expectations, and there’s a dividend yield of 4.3% looking likely. With the FTSE 100 providing an average yield of around 3.5% on a P/E of about 14, that looks like a relative bargain. But is it?

The dividend would be well covered, and it’s forecast to rise to 5% next year, so that’s not the problem. There is a fall in EPS expected this year, of 9%, and that might be keeping people away — anything related to the financial sector is still off-limits to a lot of investors. We should have a return to growth of 12% next year if prognostications prove correct, but maybe people will be waiting to see that actually happen.

I think it should happen, as last week’s Q3 update announced “a further quarter of improved performance“, with value of new business up, funds under management up, and costs reduced again.

Aerospace and Defence

BAE Systems (LSE: BA) shareholders are suffering, and though the shares started 2015 in good form, since the middle of March we’ve seen a 20% slump to 444p. BAE has been through a bit of a slowdown, and fears will be weighing heavily on the whole aerospace and defence business after recent profit warnings have sent Meggitt and Chemring shares plunging.

But those warnings looked to be company-specific, and I don’t see any danger reflecting on BAE, whose full year is expected to be stable — and it shoud provide a dividend yield of 4.7%, covered 1.8 times by earnings.

On a forward P/E of 12 this year, falling to 11 based on 2016’s forecast 5% rise in earnings, BAE shares look like a good long-term investment to me.

Banking crisis ahead?

The lowest P/E of these three falls to HSBC Holdings (LSE: HSBA), which has a Q3 update out today. On a share price of 503p, we’re looking at forward multiples of only around 10, and with dividend yields of 6.5% and better forecast, so why are they apparently so cheap?

The third quarter saw a 3% drop in adjusted pre-tax profit for the nine months, compared to the same period a year ago, even though adjusted revenue gained 2% — adjusted operating expenses rose by 6% too.

But the big problem is China, with HSBA earning close to 80% of last year’s profits from the Asian region. With Chinese growth slowing, its property market overheating, and its stock market crashing, people are fearing large amounts of bad debts and a run on the banks that might even rival the one we’ve just suffered here.

HSBC’s liquidity is a lot better than a few years ago, but the longer-term Chinese fears make HSBC the least attractive of these three to me.

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Alan Oscroft owns shares in Aviva. The Motley Fool UK has recommended HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.