Life insurers and savings providers Prudential (LSE: PRU), Legal & General (LSE: LGEN) and Aviva (LSE: AV) took a hit last year when the Chancellor announced that he was scrapping compulsory annuities in what was the largest pensions overhaul for more than 90 years. And now, the Chancellor has begun consulting on whether to treat retirement pots in a similar way to individual savings accounts (ISAs). 

At present, savers receive tax relief when they pay into a pension pot but are then taxed when the money is drawn as a pension. The proposed reforms would reverse this. Contributions would be taxed as normal while pension payouts would be tax-free.

These changes would do more than just shake up the pension system. Pensions would, to a certain extent, lose their retirement savings status — the line between retirement savings and regular investments would become blurred.

Analysts believe that this change would have two effects. Firstly, competition would increase dramatically as non-traditional pension providers entered the market. And secondly, it’s expected that overall inflows into pension products would increase.

Polarise the industry

City analysts also believe that these two changes will polarise the pensions industry. Traditional pension providers will suffer while managers like Aviva, Legal & General and Prudential, which have invested heavily in fund management divisions, will benefit.

What’s more, these providers have economies of scale. Aviva, for example, is the UK’s largest pension savings and annuities provider, allowing the group to achieve profit margins above the industry average. Legal & General is the biggest manager of UK pension assets, and Prudential has built a reputation as one of the most efficient pension managers.

These traits will help Prudential, Legal & General and Aviva pull ahead of the pack if new pension rules come into force. Not only will these companies be able to offer the best package for the best price to consumers, their size and diversification will help convince potential customers that they provide the best value for money. 

Long-term plays

Even if the proposed pension changes aren’t made into law, Legal & General, Aviva and Prudential will remain great long-term investments. Managing pensions, savings and life insurance is a long-term process that takes plenty of skill to get right. Luckily, these companies have perfected the process over the past 200 years. 

Moreover, the three pension providers are all income plays. Legal & General currently supports a dividend yield of 4.9% and Aviva supports a yield of 3.9%.

Unfortunately, as Prudential’s earnings are expected to grow by 13% this year, the company trades at a premium forward P/E of 14.4 and only yields 2.5%. However, sometimes you have to pay a premium for quality. 

The post Pension Changes May Be Great News For Aviva plc, Legal & General Group Plc & Prudential plc appeared first on The Motley Fool UK.

Momentum investors say that you should always buy into winners, and an increasing share price is a clear sign that the firm is progressing well. And famed growth investors such as Jim Slater always say that you should run your winners and sell your losers.

On the other hand, contrarian investors such as Warren Buffett say that you should buy into companies when they are unloved and oversold, and avoid businesses that have already had a strong run. After all, what goes up must come down, and what comes down hopefully will go up.

In investing, as in anything else, you take the path you choose, and you just make it work.

Prudential

Prudential (LSE: PRU) is one of the most successful insurance companies in the world. At the time of the Credit Crunch it seemed to be in trouble. The AIA takeover fell through, and people worried that it had lost its way. But by focussing on the growth markets of Asia it has found a new direction. It is now a leading provider of life insurance in Hong Kong, India, Indonesia, Malaysia, Singapore, the Philippines and Vietnam.

These are all markets which are set to keep on growing. And the recovery in earnings show the growth coming through to the bottom line. Here are the eps numbers:

2012: 85.00p

2013: 52.70p

2014: 86.80p

2015: 110.14p

2016: 124.35p

The downside is that the share price has already rocketed, increasing an amazing 10-fold since the dark days of 2008. But rising earnings mean the fundamentals are not expensive, with a 2015 P/E of 14.54, and a 2016 P/E ratio of 12.88, with dividend yields of 2.40% and 2.56%.

However, the question you have to ask is whether this firm can maintain this rate of earnings growth. Standard Chartered was another emerging markets darling which eventually reached the limits of its growth. Could the same thing happen with Prudential?

Aviva

In contrast, Aviva (LSE: AV) is more of a ‘slow and steady as she goes’ type of company. Its main markets are the UK, Canada, China and South-East Asia. I happen to own car insurance from Aviva; I love the simplicity and ease of use of the insurance it provides.

The firm had a dreadful time during the depths of the Eurozone crisis, turning a loss and undergoing a severe restructuring. But Aviva has emerged a stronger and more profitable company. And earnings per share have recovered every bit as rapidly as Prudential:

2012: -11.20p

2013: 21.80p

2014: 47.70p

2015: 47.94p

2016: 52.46p

What’s more, the company is cheaper, with a 2015 P/E ratio of 10.75, and a 2016 P/E ratio of 9.83, and dividend yields of 4.04% and 4.92%.

Foolish conclusion

Overall, I think both firms are worthy buys, and it all depends upon whether you prefer growth shares or income investments. It’s difficult to make my pick, but Prudential has already risen a lot, so I’ll take the tortoise over the hare. My contrarian instincts just give Aviva the edge.

The post Prudential plc Is Flying, So Why Would I Buy Aviva plc Instead? appeared first on The Motley Fool UK.

Background

 “Warren Buffett’s Berkshire Hathaway has bought a 3.7% stake in Insurance Australia Group for A$500 million (£249 million) as part of a partnership that IAG said would reduce its capital requirements and support its return on equity targets,” Reuters reported on Tuesday. 

Assuming no discount to their market price, Berkshire Hathaway could take a 3.7%% stake in each of Aviva and Prudential for a total of up to £2.2bn — after all, neither stock is particularly expensive at present. If Mr Buffett is not up for it, there remains a chance that private equity may eye stakes in either British insurer, in my view.

The market doesn’t seem to price in such an outcome, though — and here lies the opportunity. 

Aviva

High synergies is the name of game at Aviva following its £5.6bn takeover of Friends Life. It’s not to say that such a strategy earned it a round of good publicity, but that’s the inevitable way forward, which appeared clear since first deal rumours emerged at the end of November. 

A “capital raising in disguise”, as the deal was labelled by some analysts, the tie-up is more than that — it’s an attempt aimed at rendering Aviva an even more efficient entity on its cost base. The market has yet to be convinced that its strategy would work: Aviva’s stock price has gone nowhere in the first half of the year. 

Its lowly relative valuation, however, could make it an appealing target for Mr Buffett and private equity. When Mr Buffett makes a move, others tend to follow (as usually happens when the laggards try to catch up with the leaders).

An example? 

“Apollo Global Management is mimicking Warren Buffett’s investment strategy by using its recent $1.8bn takeover of Aviva’s US fixed annuity business to build an insurance operation with more than $60bn in assets,” the Financial Times reported in November 2013. 

Now it may not be too different: a 4% stake in Aviva would cost up to £800m.  

Prudential 

“There’s a lot of interest in the private sector for insurance assets, and Prudential would benefit from an investor like Buffett after the departure of its chief executive,” a senior rainmaker in New York told me in the wake of the IAG deal. “Private equity interest also makes a lot of sense.“

Prudential has not done much better than Aviva in recent months on the stock exchange. A 4% stake in Prudential would cost up to £1.6bn, although eager buyers would have saved a fortune had they invested 12/24 months ago. 

“The story could repeat in a couple of years’ time,” my source concluded. 

Investors are not entirely convinced that Aviva and Prudential will draw the attention of strategic buyers, but Buffett’s latest move signals that the valuation of the sector’s leaders may appreciate at a faster pace than in the past on the back of investment targeting some of the biggest players in the industry. 

The post Are Aviva plc & Prudential plc Targets For Warren Buffett & Private Equity? appeared first on The Motley Fool UK.

Significant Potential

One stock that is trading at a super-low price level is Standard Chartered (LSE: STAN) (NASDAQOTH: SCBFF.US). For example, it currently has a price to earnings (P/E) ratio of just 11.8, which is considerably below the FTSE 100’s P/E ratio of around 16. As such, an upward rerating could be on the cards.

Of course, Standard Chartered is going through a highly uncertain period at the present time. For example, it is in the midst of a management change that will see a smaller, more focused board running the bank and, with the Chinese economy still experiencing a soft landing, the outlook for the bank’s bottom line is not particularly impressive. In fact, Standard Chartered is expected to see its bottom line fall by 7% this year, which is clearly disappointing news for its investors.

However, looking further ahead, Standard Chartered has considerable potential. The Chinese economy holds great promise for banking stocks as it transitions towards a consumer-led economy that requires significant amounts of credit – for both businesses and individuals. And, with it having poured significant resources into Asia in recent years, Standard Chartered could be well placed to take advantage. Moreover, with Standard Chartered forecast to increase its bottom line by 14% next year it appears to offer growth at a very reasonable price, since it has a price to earnings growth (PEG) ratio of just 0.7.

Sector Peers

Clearly, the likes of Prudential (LSE: PRU) and Legal & General (LSE: LGEN) also have enticing futures ahead of them. However, even though Prudential is also in the midst of changing its CEO, it does not trade on as low a multiple of earnings as is the case with Standard Chartered, with the former having a P/E ratio of 14.6, for example.

Of course, Prudential does have an excellent track record of growth, with it increasing its bottom line in each of the last five years, but its PEG ratio of 1 is almost 50% higher than that of Standard Chartered, thereby making is less appealing.

Similarly, Legal & General may have a P/E ratio of just 14.2 and a PEG ratio of 1.1, but it lacks appeal compared to Standard Chartered. Furthermore, it does not have the same level of exposure to Asia as Standard Chartered does and, in the long run, may not offer quite the same growth potential.

Looking Ahead

Certainly, Legal & General’ double digit growth prospects and a yield of 4.9% may compare favourably to those of Standard Chartered, which has a similar rate of growth for next year and a yield that is only slightly lower at 4.7%. However, when it comes to which of the three could deliver the highest capital gains over the medium to long term, Standard Chartered is considerably cheaper than Prudential and Legal & General and, as such, looks most likely to benefit from an upward rerating moving forward. Therefore, while all three are great stocks, Standard Chartered is the one I would buy first.

The post Why Standard Chartered PLC Is A Better Buy Than Prudential plc And Legal & General Group Plc appeared first on The Motley Fool UK.

Over the course of the next year, Santander (LSE: BNC) (NYSE: SAN.US) is expected to increase dividends per share by 7%. That’s a very appealing rate of growth – especially when you consider than interest rates in the UK are forecast to remain at or near historic lows over the medium term. As such, Santander’s forward yield of 3.5% could hold considerable appeal – especially if it continues to increase dividends at a rapid rate.

Encouragingly, Santander’s payout ratio is rather modest. Of course, it slashed dividends this year and this now means that it pays out just 40% of profit as a dividend. This provides it with significant scope to increase dividends moving forward, which could act as a catalyst on its share price over the medium to long term.

In addition, Santander’s price to book (P/B) ratio of just 1.2 indicates that its shares offer great value, as well as top notch income potential.

Brewin Dolphin

Shares in investment management company, Brewin Dolphin (LSE: BRW), fell by over 9% today even though it reported impressive half year results. For example, discretionary funds under management increased to £26.2bn from £24bn at the end of its previous financial year, with its £37.9m pretax profit being significantly higher than the £22m reported in the same period last year. Furthermore, Brewin Dolphin continues to successfully transition to a stronger business model, although the pace of this transition appears to be somewhat slower than many investors were hoping for.

Still, Brewin Dolphin is forecast to increase its bottom line by 12% this year, and by a further 19% next year. This puts it on a price to earnings growth (PEG) ratio of just 0.8, which indicates that its shares could continue to rise even though they are up a whopping 144% in the last five years. Therefore, while today’s share price fall may put off shorter term buyers, for long term investors it presents a very appealing opportunity to buy in at a great price.

Prudential

With the future of the FTSE 100 being relatively uncertain at the present time due to the potential for the UK to leave the EU and the impact of interest rate rises, investors may begin to seek out stocks with top notch track records. One such company is Prudential (LSE: PRU). For example, over the last five years it more than doubled net profit, with dividends also increasing at a similar pace. This could lead to its shares trading at a premium, as investors begin to view Prudential as a relatively safe bet.

Looking ahead, its share price could rise significantly, since Prudential is expected to increase its earnings by a further 28% over the next two years. As such, and while it does have a relatively high price to book (P/B) ratio of 3.6, now seems to be a great time to buy a slice of Prudential, with a change in management also likely to bring fresh ideas and impetus to its future financial performance.

The post 3 Finance Stocks Set To Post Stunning Returns: Banco Santander SA, Brewin Dolphin Holdings plc And Prudential plc appeared first on The Motley Fool UK.

Vodafone’s (LSE: VOD) (NASDAQ: VOD.US) strategy of buying undervalued European assets such as Kabel Deutschland and Spain’s Ono, could finally be starting to pay off. Certainly, it has meant relatively weak earnings growth and investor sentiment for a sustained period, but with the Eurozone likely to see a major improvement from the effect of QE, Vodafone’s bottom line is set to benefit from a boost moving forward.

In fact, Vodafone is forecast to increase its earnings by 19% in financial year 2017, which would be a major improvement on the profit declines that have become all too common in recent years. And, with Vodafone also set to benefit from an increased diversity of income through the provision of other services such as pay-tv and broadband, its earnings could become more stable over the medium to long term, too.

Prudential

Although there is a relatively large choice when it comes to high quality insurance companies on the FTSE 350, Prudential (LSE: PRU) remains a stock with significant long-term profit potential. That’s at least partly because it offers excellent growth prospects, with its bottom line forecast to rise by 14% in the current year, and by a further 12% next year.

That’s ahead of the wider market’s growth rate and, despite this, Prudential trades at a rather enticing discount to the FTSE 100. This means that its shares could benefit from an upward rerating over the medium to long term. In fact, Prudential has a price to earnings (P/E) ratio of 14.7 versus around 16 for the FTSE 100, which is a difficult discount to justify given Prudential’s track record of profit growth, diversity and sound growth strategy.

Of course, there could be some instability in the short run as Prudential adapts to a new management team, but for long term investors it looks like a sound buy compared to the FTSE 100 at the present time. And, while today’s first quarter update showed relative weakness in the US and UK markets, Asia continues to be a strong growth area for the company and this highlights how Prudential’s diversity provides stability, as well as upbeat growth prospects, over the long term.

Direct Line

Although Direct Line (LSE: DLG) has reported lower gross premiums in today’s first quarter results, the insurer remains on-track to meet its full-year expectations. As such, shares in the company have risen by 1%, meaning they are now up by 27% over the last year.

And, with Direct Line’s combined operating ratio set to be between 94% and 96% this year, the company appears to be making sound progress, while cost cutting is moving in the right direction. In fact, Direct Line has managed to reduce costs to £220m from around £245m in the same quarter of the previous year.

Despite its strong share price performance, Direct Line still offers excellent value for money. For example, it trades on a P/E ratio of 11.9 and this indicates that its shares could continue to be rerated upwards and it looks set to beat the FTSE 100 over the medium to long term.

The post 3 Stocks Set To Beat The FTSE 100: Vodafone Group plc, Prudential plc And Direct Line Insurance Group PLC appeared first on The Motley Fool UK.

Valuations

Despite this money-making potential, insurance companies in the FTSE 100 continue to offer excellent value for money. In fact, while the FTSE 100 is at an all-time high and there are question marks regarding its potential to move higher throughout the course of the year, the insurance sector holds tremendous opportunity.

For example, Aviva (LSE: AV) (NYSE: AV.US) currently has a price to book (P/B) ratio of just 1.75, which indicates that its shares could move significantly higher. Furthermore, Aviva has a price to earnings (P/E) ratio of just 11.6, which is considerably lower than the FTSE 100’s P/E ratio of 16. In fact, if Aviva were to have the same P/E ratio as the FTSE 100, it would mean its shares trading an incredible 38% higher than their current level and, with Aviva’s bottom line set to grow by 16% next year, it is difficult to justify such a low valuation versus the wider index.

The same is true of Prudential (LSE: PRU) (NYSE: PUK.US). Certainly, there is uncertainty regarding its new CEO and the strategy that will be employed moving forward. However, the company’s share price appears to more than fully reflect this risk, with Prudential having the potential to become a top notch income play in future.

In fact, while Prudential currently yields just 2.4%, it has increased dividends per share at an annualised rate of 10.8% during the last five years. This rate of growth shows little sign of slowing, with Prudential expected to bump up dividends by 12% next year and, looking ahead, a continuation of this trend seems likely and could push the company’s share price much higher.

Certainly, there have been strong performers within the insurance sector. For example, shares in Direct Line (LSE: DLG) have risen by 35% in the last year but, as with Aviva and Prudential, they could have much further to go. That’s because Direct Line trades on a P/E ratio of just 12.2, which indicates that investor sentiment could pick up markedly. And, with the company’s shares having a beta of just 0.6, it could prove to be less volatile than the wider index and, therefore, a relatively defensive option.

So, while many investors may feel that the FTSE 100 could be due a pullback, Aviva, Prudential and Direct Line show that there is still excellent value for money within the insurance sector. And, with bright futures and excellent dividend potential, all three companies could boost your returns over the medium to long term.

The post 3 Insurance Stocks Set To Boost Your Returns: Aviva plc, Prudential plc And Direct Line Insurance Group PLC appeared first on The Motley Fool UK.

Performance

Aviva has risen 10% since the turn of the year but has struggled to deliver value in recent weeks, with its shares down 5% in the last month of trading, after a +12% performance in the first quarter, excluding dividends. Its second-quarter performance reads -2.4% so far.

Not only do investors seem reluctant to back Aviva, but it looks like a lot of scepticism also surrounds Prudential, whose stock has risen 10% since the beginning of 2015. Its Q1 performance is in line with that of Aviva, but the shares have equally lost ground in the last month of trading. Finally, Prudential is down 1.4% in the second quarter, which compares with +3.7% for the FTSE 100.

Time To Add Risk? 

It may be time to add exposure to both companies if you are willing to take insurance risk and add some volatility to your portfolio.

As you should know by now, in order to add Aviva to your portfolio you must have faith in its £5.6bn acquisition of Friends Life; meanwhile, if you are planning to invest in Prudential, you must assume that its new chief executive and its hiring strategy will manage to please institutional investors. 

Aviva

A top-down approach suggests that regulatory risk could be significant, although a few analysts revised their price targets to between 600p and 700p earlier this week. The stock trades at 535p and could easily surge to 600p, based on fundamentals and trading metrics. Its forward earnings multiples for 2015 and 2016 are 11x and 10x, respectively, with a forward yield at 3.8% and 4.6%. 

Of course, much of its fortunes hinge on the successful integration of Friends Life, a deal promising hefty synergies that should support management’s bullish views on cash flows and dividends. Pay attention to operating margins as well as updates on core cash flows and dividend cover when Aviva reports its first-quarter results on 7 May. 

Prudential

“Mike Wells, head of Prudential’s US business — and the executive most widely tipped to succeed Thiam — was the company’s second highest paid board member, earning total compensation of 11.39 million pounds,” Reuters reported at the end of March… it’s been radio silence since then.

In truth, a new boss should have been appointed by now, but a lack of leadership is only partly to blame for Prudential’s disappointing performance in recent times. 

Based on trading multiples, Prudential is 30% more expensive than Aviva, with a lower yield at 2.4% and 2.7% in 2015 and 2016, respectively. Its more conservative dividend and corporate strategy signal less risk, but then its stock isn’t exactly in bargain territory. That’s something its new chief executive should consider.

The post Have Aviva plc And Prudential plc Topped Out Already? appeared first on The Motley Fool UK.

Markets saw that as disastrous news for major FTSE 100-listed life companies such as Aviva (LSE: AV) (NYSE: AV.US), Legal & General Group (LSE: LGEN) and Prudential (LSE: PRU) (NYSE: PUK.US). Their share prices collapsed also.

The prospect of losing large future revenue streams as the over-55s abandoned rigid, traditional annuities was certainly daunting.

So far, they have overcome the threat with ease. And now that the post-pension reform market is shaping up, it may turn into an opportunity instead.

Life In Life

It is surprising to see how well the life companies have performed since the announcement.

Although Aviva has only returned a stolid 8%, L&G is up 33% and Prudential is up 26%.

Part of this, inevitably, is down to the fact that they are heavily-diversified global businesses, with Prudential in particular thriving in higher-growth Asian markets.

That has allowed them shrug off any decline in the UK annuity market. They have found other compensations at home, through lines such as corporate pensions, bulk annuity premiums, and personal and business protection.

Now they are acting to make good their personal annuity revenue losses as well.

Flexible Fun

Mr Osborne’s reforms are inspiring a rash of innovation in the at-retirement income market, as insurers jostle to bring new products to market.

Most people clearly aren’t going to blow their pension pots on Lamborghinis, and will be looking for ways to ensure their retirement income lasts as long as they do, but without locking into a restrictive annuity.

Insurers have responded by launching new flexi-access drawdown plans, a halfway house between an annuity and income drawdown, combining the security of the first with the flexibility of the latter.

Aviva was quick off the mark with its capped and flexible income drawdown products last year, shortly after the reforms were announced.

L&G offers flexi-access income drawdown with full and partial withdrawals, Prudential offers flexi-access drawdown as well.

It is too early to say how well these products are performing. But there is an army of brokers and advisers keen to sell them, and satisfy their clients’ desire for new more flexible retirement income options.

Long Live Annuities

Traditional annuities are out of favour today, but that may not always be the case. There is a strong case for people to use at least half their pension to lock into a guaranteed income for life, then leave the rest invested through income drawdown.

And as the downside of the reforms become apparent, as thousands blow their pension pots, old-fashioned annuities may one day storm back into fashion.

Especially when interest rates start rising, allowing people to lock in at higher income levels.

Pension freedom was originally seen as bad news for Aviva, L&G and Prudential. Ultimately, they could find it quite liberating.

The post Pension Freedom Could Liberate Aviva plc, Legal & General Group Plc And Prudential plc appeared first on The Motley Fool UK.

It’s little wonder that shares in BHP Billiton (LSE: BLT) (NYSE: BBL.US) are dirt cheap at the present time. After, all iron ore is near to a ten-year low, the price of oil has fallen heavily, while most other commodities are also suffering from severe price falls, too. So, the fact that BHP has good diversification counts for little at the moment, which has caused its share price to fall by 25% in the last year and means that BHP now yields a whopping 5.6%.

This high yield indicates that its shares offer good value and, furthermore, they are expected to yield an incredible 6.1% next year. As a result, now seems to be a great time to buy them, with the long term outlook for commodities likely to be far brighter than it has been in the past, with an improving global economy and the potential for Chinese stimulus likely to push BHP’s shares upwards.

Prudential

A key attraction of Prudential (LSE: PRU) (NYSE: PUK.US) is its superb growth profile. Unlike most other insurance stocks, it has been able to post five successive years of profit growth, with the next two years set to see this trend continue. In fact, Prudential’s bottom line is expected to be 28% bigger in 2016 than it was in 2014, which would represent an impressive result.

Despite this, Prudential still trades at a very appealing share price. Certainly, its near term future may be somewhat uncertain given the change in CEO, but its price to earnings growth (PEG) ratio of just 1.1 indicates great value for such a top quality business. As such, its share price looks set to rise at a brisk pace.

CRH

With low interest rates set to stay over the medium term, construction-focused stocks such as CRH (LSE: CRH) look set to benefit from an economic tailwind. In fact, the company’s bottom line is forecast to almost double over the next two years, which places it as one of the fastest growing stocks on the FTSE 100 at the present time.

And, while CRH does trade on a rather rich rating of 21.3, this equates to a PEG ratio of just 0.5, which makes CRH appear to be a bargain when its growth potential is taken into account. And, with its shares currently yielding 2.6% from a payout ratio of 55%, it could become a strong income play if the additional earnings are used to increase shareholder payouts at a rapid rate, too.

The post 3 Bargain Basement Stocks: BHP Billiton plc, Prudential plc And CRH PLC (UK) appeared first on The Motley Fool UK.