FTSE 100 insurer Aviva (LSE: AV) and asset manager Legal & General Group (LSE: LGEN) are both popular high-dividend-yield stocks. They might seem similar, but Aviva’s share price has risen by nearly 50% over the last year, while Legal & General is up just 20%.
However, if we take a step back then the picture changes. Legal & General shares have risen by 140% over the last 10 years, while Aviva’s share price is unchanged from 2011. Aviva is playing catchup. Can it continue to outperform, or should I back long-term winner L&G?
Aviva: what’s happening?
Aviva chief executive Amanda Blanc has made her mark on the company since taking charge in July 2020. After years of timid restructuring by previous bosses, Blanc has sold eight of the group’s international businesses in under a year, raising £7.5bn.
The big question is what happens next. She’s prioritised debt reduction but has also promised that shareholders will receive “a substantial return of capital” at some point. I suspect this could be later this year.
As a shareholder, I’m pleased to see Aviva’s share price finally trading at a level that reflects the value I see in the business. However, there’s still a potential problem.
Aviva is now focused on its core insurance businesses in the UK, Ireland, and Canada. These are markets where Aviva has a strong brand and a big share of the market. The challenge Blanc faces now is to show that these mature businesses can still deliver steady growth.
At a share price of 423p, Aviva is trading on eight times forecast earnings, with a dividend yield of 5.7%. I think the stock still looks decent value, but it’s not as cheap as it was.
Legal & General: a proven performer
Even in the midst of the pandemic, Legal & General was able to deliver a strong set of results. The group generated a return on equity of 17% and an operating profit of £2,218m — almost unchanged from 2019.
Surplus cash generated from the group’s operations was unchanged at £1.5bn. This provided good support for the dividend, which cost around £1.1bn.
What could go wrong? The risk that concerns me is the size and complexity of Legal & General’s business. The company’s balance sheet shows £571bn of assets and just £10bn of equity. Any changes to the valuation of the firm’s assets and liabilities could have a big impact on the stock’s book value and on future cash flows.
However, most of the company’s investments and liabilities have a very long-term focus. This seems to provide some protection from short-term events such as last year’s market crash.
I don’t see any reason why L&G’s model shouldn’t keep working. With the stock trading on nine times forecast earnings and offering a 6.5% yield, I think Legal & General looks attractive.
L&G vs Aviva share price: my verdict
Although I own Aviva shares, the stock I’d buy today would be Legal & General.
L&G has a stronger and more consistent track record of profitability and growth than Aviva. This is reflected in the company’s share price, which has outperformed Aviva’s share price over two, five and 10 years.
Aviva is still a turnaround — and it might not succeed. But Legal & General is a proven success. That’s why I’d buy.
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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.