Investors have traditionally wanted plentiful exposure to the financial services sector. It is where the money is, after all. Financials was one of the most rewarding sectors to invest in before the credit crunch and it has been one of the most disastrous ever since. Could it still make you rich?
Banking stocks may have struggled since the financial crisis but the insurance sector has boomed. Over the past five years, Standard Life is up 78%, Asia-focused Prudential has soared 145% and Legal & General Group has flown a joyous 160%. Aviva (LSE: AV), which I bought as a recovery play a few years ago, is up, ahem, 14%. Aviva continues to be the bridesmaid rather than the bride, although looking at those performance figures I wonder whether it has been invited to the wedding at all.
It now looks cheap at around 10 times earnings and even the dividend, cruelly slashed in 2013, is looking respectable again at 3.72%. Maybe Aviva has been harshly treated, given its rapid integration of recent purchase Friends Life, 11 consecutive quarters of new business growth, and progress towards Solvency II capital requirements. Chief executive Mark Wilson’s attempts to build a stronger, leaner business are praiseworthy, although maybe not quite thrilling enough. Forecast earnings per share (EPS) growth of 12% next year, lifting the yield to 5%, suggest that Aviva could make you a little richer. If slowly.
Santander (LSE: BNC) has endured a troubled five years seeing its share price has almost halved from 701p to today’s 370p. Only Standard Chartered has fared worse, down 68% over the same period. Both have been punished for the same reason they were celebrated before the financial crisis: their diverse global reach which included plenty of exposure to once booming emerging markets.
In the case of Santander, it is Brazil that has done the damage. The healthier UK economy has compensated, with Santander UK recently reporting a 6% jump in Q3 pre-tax profit to £496m, buoyed by the success of its 123 current account. The European Central Bank’s QE-fuelled attempts to revive the Eurozone may help Santander recover in Spain.
Santander began 2015 by slashing its dividend but it still yields around 3.8%. At 11 times earnings, the price is reasonable. Brazil, however, remains a drag.
BARC Or Bite?
I expected better from Barclays (LSE: BARC) this year but then, I expected better from stock markets generally. The bank is down 16% to 234p over the last three months as investors scorned its Q3 results, which showed adjusted profit before tax down 10% to £1.4bn and a whopping 23% lower than the previous quarter, when it posted £1.85bn.
Investors were also concerned about the prospects for Barclays’ investment banking. A seemingly impressive 31% rise in nine-month profits to £1.76bn apparently fell apart in month 10. Like so many FTSE 100 companies, Barclays is busy cutting costs and ditching non-core assets to focus on UK retail and business banking, Barclaycard and the African businesses. Smaller, leaner Barclays is forecast to grow EPS by 29% this year and 20% next, which looks zippy to me, and the yield is expected to creep up to 3.6%. The recent share price dip makes it a buy but please don’t expect to get rich quick. Then again who does, these days?
Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Barclays. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.