3-Point Checklist: Should You Buy Aviva plc, Standard Life Plc or Prudential plc?

Aviva plc (LON:AV), Standard Life Plc (LON:SL) and Prudential plc (LON:PRU) all delivered strong performances last year.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

If you’re building a diversified portfolio of stocks, you’re quite likely to own shares in Aviva (LSE: AV) (NYSE: AV.US), Standard Life (LSE: SL) or Prudential (LSE: PRU).

These firms all have geographically diversified operations, and should be good long-term income buys — but they aren’t all equal.

In this article, I’ll take a look at the outlook for all three, and explain which one I’d buy today — and why.

Income matters

In my opinion, dividend income and yield are a key attraction of insurance stocks: a well-run insurance company should generate surplus cash.

From big cap heavyweights such as these, I expect a reliable, progressive dividend that keeps pace with inflation –preferably with an above-average yield.

Here’s how the picture looks at the moment:

 

Aviva

Standard Life

Prudential

2015 forecast yield

3.7%

4.6%

2.4%

5-year average dividend growth rate

-6.6%

+5.5%

+9.1%

In my view, Standard Life is the most attractive option here: the high yield is likely to compensate for Prudential’s faster growth.

Aviva does poorly, thanks to its track record of dividend cuts, most recently in 2012 and 2013.

Is the price right?

The insurance sector has been on a strong run over the last couple of years: Aviva has gained 89%, Prudential 64%, and Standard Life 48%.

After such big gains, it’s important to look at valuation — are these shares still attractively priced?

 

Aviva

Standard Life

Prudential

2015 forecast P/E

11.4

16.9

15.3

2015 forecast earnings per share growth

2.5%

77%

27%

Standard Life looks the most expensive, despite the massive increase in earnings per share that’s expected this year from organic growth, and last year’s acquisition of Ignis Asset Management.

In contrast, Aviva looks cheap, while Prudential is somewhere in the middle — although with sure-footed chief executive Tidjane Thiam about to leave, it may pay to be cautious. Is the Pru’s breakneck growth about to slow?

Profit margins

It’s easy to focus on P/E and yield, without considering how profitable a company is, but this can be a mistake: a company that generates higher returns can often sustain a higher valuation.

 

Aviva

Standard Life

Prudential

2014 operating margin

6.1%

4.0%

4.4%

Prudential and Standard Life look similar, but Aviva’s operating margin of 6.1% is significantly higher. I’ve been impressed by Aviva chief executive Mark Wilson’s focus on cash generation and profitability and the firm’s 2014 results confirmed my faith in Mr Wilson’s plans.

Today’s best buy?

Each of these firms has something to offer, but my choice to buy today would be Aviva, which offers a reasonable yield and is valued at a significant discount to its peers.

Aviva’s recovery may yet falter, but I’m happy to continue to trust Mr Wilson’s ability to transform the firm into a growing, profitable and cash generative operation.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head owns shares in Aviva. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

How’s the dividend forecast looking for Legal & General shares in 2025 and beyond?

As a shareholder, I like to keep track of the potential dividend returns I could make from my Legal &…

Read more »

artificial intelligence investing algorithms
Investing Articles

Could buying this stock with a $7bn market cap be like investing in Nvidia in 2010?

Where might the next Nvidia-type stock be lurking in today's market? Our writer takes a look at one candidate with…

Read more »

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

Is the S&P 500 going to 10,000 by 2030? This expert thinks so

One stock market strategist sees animal spirits taking hold and driving the S&P 500 index even higher by the end…

Read more »