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Why I’d consider buying this high-flying FTSE 250 growth stock alongside Aviva

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Here at the Fool we continually bang on about the importance of diversification, with good reason. Given that we can never be sure what the future holds, there’s absolutely no sense in keeping portfolios overly concentrated in one specific sector or industry.

That said, there are some occasions when holding more than one stock in a similar line of business isn’t necessarily a bad idea. Here’s one example that springs to mind.

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Back on track

In my opinion, FTSE 100 insurance giant Aviva (LSE: AV) remains an excellent pick for both growth and income investors.  That’s despite the fiasco that enveloped the company in March after declaring it might cancel its preference shares as part of the strategy to return capital to investors.

Having drawn heavy criticism, this idea was eventually kicked into touch. At the end of April, the £22bn-cap said it would pay out roughly £14m in compensation to holders who sold out after the company’s declaration. Offering a goodwill payment was the “right thing” to do, according to CEO Mark Wilson.

While not exactly great for its reputation, the recent bounce in the share price does suggest that investors have quickly forgiven Aviva. Moreover, the attractions of owning the stock continue to pile up.

With “significant excess capital” on its books, the company recently commenced a £600m share buyback. Since it still looks undervalued at just 9 times forecast earnings, this strikes me as a sound move, as does using the remainder of its £2bn cash pile to reduce “expensive” debt and invest in bolt-on acquisitions. A dividend yield of 5.6% based on today’s share price is also well over four times what you could get from the best instant access cash ISA.

It may be more exposed to global economic wobbles than some but, so long as you’re happy to play the long game, I think Aviva could easily be a core holding for many investors. 

Future FTSE 100 stock?

Those interested in adding more than one insurance company to their portfolio may also wish to take a look at Hiscox (LSE: HSX).

At £4.3bn, the Bermuda-based business is one of the biggest companies in the FTSE 250 index. Assuming recent performance continues, it could eventually push its way into the market’s top tier.

Over the three months to the end of March, gross written premiums grew a little over 20% to $1.16bn. Most of this came from its Retail division, where premiums rose 14% (in constant currency) to just under $573m. Having taken advantage of a “hardening market“, the London Market and Re & ILS divisions also climbed 8.7% to $219.8m and a very solid 42% to $363.1m, respectively.

Despite enduring a horrible 2017 in which profits were severely impacted by hurricanes in the US and earthquakes in Mexico, Hiscox’s share price has climbed 30% over the last 12 months, leaving it trading on 20 times predicted earnings. As well as being a whole lot more expensive to buy, the dividend yield — at just over 2% — is also significantly lower than that offered by Aviva.

With a PEG ratio of just 1, however, it could be argued that the stock is still reasonably priced given that earnings are now expected to recover. This, combined with its decent balance sheet/net cash position, makes me think there are a lot worse companies out there to invest in.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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