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Why I think the Aviva share price could be the FTSE 100’s biggest bargain

When I talk about FTSE 100 stocks and bargains, I usually mean companies that look cheap relative to their assets and have the potential to pay generous, ongoing dividends.

Today I want to look at two FTSE companies which I believe fit this description. First up is insurance giant Aviva (LSE: AV).

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Shares in this firm are worth about 20% less than they were one year ago. Why is this? I’m not sure. Last year’s results showed rising profits, a dividend increase, and stable finances. More of the same is expected in 2019. As I’ll explain, I think Aviva offers good value.

Not perfect

Things aren’t perfect, of course. The company recently spent six months without a chief executive. New boss Maurice Tulloch seems to be planning some changes, but we don’t yet know what they are. So there’s uncertainty about the company’s strategy.

A second concern is that Aviva’s profitability and growth rate have been lower than those of some rivals in recent years. After-tax profits only rose by 2% last year, and the firm’s return on shareholder’s equity of 14% was significantly lower than rivals such as Prudential (25%) and Legal & General (22.7%).

I’m still a buyer

Although Aviva has lagged the top-performing firms in its sector, the group’s performance is not bad, in my view. Cash generation has been especially good and the dividend has grown steadily.

I think the issues I’ve discussed are already reflected in the share price. At about 400p, AV shares are trading below their book value of 424p per share and on a 2019 forecast price/earnings ratio of just 6.7.

This year’s expected dividend of 32.2p per share looks affordable to me and gives a 7.9% yield. I rate the shares as a buy and remain a happy shareholder.

Digging deep

My second pick is mining and commodity trading group Glencore (LSE: GLEN). Like Aviva, it looks cheap compared to peers and has a strong track record of cash generation and dividends.

However, there are some risks.

One concern is that Glencore is currently the subject of a US Department of Justice investigation into alleged corruption. This could result in a costly financial penalty at some point — we don’t really know.

Eco worries

I think a bigger concern is how the group will address environmental and corporate governance concerns. As one of the world’s largest producers of the thermal coal used in power stations, the business is still heavily involved in a sector that some rivals are now avoiding.

The group’s mining operations in countries such as the Democratic Republic of Congo are also seen as much riskier than mines in developed markets such as Australia.

These are valid concerns, but I don’t think they’re deal-breakers. The coal business could be sold if necessary, and Glencore’s copper and cobalt mines in Africa look well positioned to profit from the shift to electric power.

In the meantime, the company’s commodity trading business proved to be a reliable source of profits during the 2015/16 mining crash.

Glencore stock now trades in line with its book value and on a forecast price/earnings ratio of about 10. Analysts expect a dividend of $0.19 per share this year, giving a yield of 5.8%. I think GLEN stock could be a buy at current levels.

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Roland Head owns shares of Aviva. 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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