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Thinking of investing in buy-to-let? Buying FTSE 100-member Aviva may be a better idea

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With UK property prices having risen significantly in the last couple of decades, buy-to-let remains a tempting option for many investors. The reality, though, is that tax changes, uncertainty regarding Brexit and difficulties obtaining finance mean that the FTSE 100 may offer a superior risk/reward ratio.

Within the UK’s main index, Aviva (LSE: AV) seems to offer excellent value for money. The company has a low valuation, high yield and a clear growth strategy. As such, it could be worth buying right now for the long term. In comparison to other shares, such as a smaller stock which reported on Tuesday, it appears to be dirt cheap.

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High valuation

Releasing a trading update on Tuesday for the year to 30 September 2018 was Treatt (LSE: TET). It manufactures and supplies innovative ingredient solutions for the flavour, fragrance, beverage and consumer product industries. The company performed well in the second half of the year, with its revenue and profit figures expected to be in line with previous guidance.

Its US expansion is progressing as planned, with building work being on time and on budget. This will provide additional manufacturing capacity, as well as enhance its scientific capabilities in the US. Plans for the relocation of the company’s UK site are progressing as planned.

Looking ahead, Treatt has ambitious expansion plans over the coming years. This could provide greater growth opportunities further down the line, but with a relatively high valuation its investment appeal seems to be limited. It has a price-to-earnings (P/E) ratio of around 31. Since earnings growth of 4% is expected in the current financial year, its potential to deliver improving share price returns may be low.

Return potential

In contrast, the Aviva share price continues to offer a wide margin of safety. The company has a P/E ratio of around 9, despite an impressive earnings growth outlook. It is expected to report a rise in earnings of 9% in the next financial year, with an ambitious growth strategy set to deliver further growth in future years. The company is investing heavily in fast-growth markets which, in the long run, have the potential to contribute significantly to its overall profitability.

With Aviva in the process of reducing leverage and engaging in M&A activity as it seeks to deploy excess capital, its financial position appears to be sound. The restructurings of previous years have created an efficient and highly-profitable business which looks set to perform well in the long run.

With a dividend yield of 6.1% that is covered twice by profit, Aviva’s income potential appears to be high. Therefore, it would be unsurprising for it to outperform the FTSE 100 over the long run. And since it offers diversity, a low valuation and the potential for a high income return, it could be a better performer than a buy-to-let property over the coming years.

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Peter Stephens owns shares of Aviva. The Motley Fool UK has recommended Treatt. 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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