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The Beginners’ Portfolio is a virtual portfolio, which is run as if based on real money with all costs, spreads and dividends accounted for.
I added Aviva (LSE: AV) to the portfolio back in March 2013, with my final choice being made between Aviva and RSA Insurance Group (LSE: RSA). Both had seen their dividends overstretched during the crunch and both had been forced to slash their annual payouts.
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The share prices of the two had slumped as a result, but I really thought Aviva had been oversold and was just too cheap.
Aviva shares have since climbed by 59% — and after all costs of buying and selling and the price spread are considered, the portfolio has actually made a gain of 61% with dividends added. And that beats the pants of RSA and the rest of the big insurers, so over the short term at least it was the right decision.
But how are the insurers looking now, and is Aviva the right one to stick with for the long term? Here’s a look at forecasts for the big players:
| Company | Aviva | RSA | Prudential | Legal & General |
Old Mutual |
|---|---|---|---|---|---|
| Recent share price | 511p | 490p | 1,394p | 227p | 201p |
| 12-month change | +50% | -5% | +18% | +22% | -8% |
| P/E Dec 2014 |
10.9 | 12.8 | 14.5 | 13.8 | 10.8 |
| EPS growth 2014 |
+114% | +10% | +83% | +8% | +1% |
| Div growth 2014 | +10% | +18% | +6.6% | +14% | +8.8% |
| Div yield 2014 | 3.2% | 2.4% | 2.6% | 4.7% | 4.3% |
| Div cover 2014 | 2.85x | 3.22x | 2.70x | 1.55x | 2.15x |
| P/E Dec 2015 |
9.9 | 12.6 | 13.1 | 12.7 | 9.8 |
| EPS growth 2015 |
+10% | +1% | +11% | +8% | +10% |
| Div growth 2015 | +15% | +41% | +9.9% | +13% | +13% |
| Div yield 2015 |
3.7% | 3.4% | 2.8% | 5.3% | 4.9% |
| Div cover 2015 | 2.74x | 2.31x | 2.72x | 1.49x | 2.08x |
Variety
Looking at the table, we can see quite a range. Aviva’s dividend has already bottomed out and should be lifted to yield around 3.2% this year, and that’s pretty much bang on the FTSE average. We want more than that from an insurer, and we’re almost certain to get it — Aviva is back to healthy growth, the management has committed itself to a policy of sustainable dividend growth, and the City is predicting 3.7% for 2015.
Things look similar at RSA, but forecast earnings recovery is less impressive and the dividend should still be around a poor 2.4%. On top of that, we’re looking at a forward P/E that values the shares more highly than Aviva. On the head-to-head, I think Aviva is still the better choice.
Bigger yielders
Legal & General (LSE: LGEN) and Old Mutual (LSE: OML) are still offering higher dividend yields, at 4.7% and 4.3% respectively. But Legal & General’s cover by earnings is rather weak at just 1.55 times, and that leaves it open to risk should the industry face another streak of tough business — and that forward P/E of 12.7 looks high relative to the rest (though lower than the FTSE’s long-term average of around 14).
On those fundamentals, Old Mutual looks like a better bet to me — the shares are less highly valued, and the mooted dividends are much more strongly covered. The downside is that there’s just about no earnings growth expected this year, and the 10% penciled in for 2015 has to be very uncertain this far ahead. But for a long-termer, Old Mutual has to be a serious candidate.
The safest hands?
Then we come to the enigma that is Prudential (LSE: PRU) — on the highest P/E multiple of the five, but with very low dividend yields. The Pru’s cash handout is well covered at 2.7 times, but Aviva looks set to beat it for yield while providing better cover. On these figures alone, Prudential looks overvalued.
But the company is well-named, as prudence is indeed one of its virtues. Prudential did better than the rest during the recession and was never at any real risk, and it is managed conservatively (and, I have to say, very well indeed). Over the very long term, Prudential might even prove to be the best investment of the sector.
Same again?
On the whole, then, I still think Aviva edges ahead even after its impressive share price recovery, but there’s less in it these days — and if I had to make the choice again today the alternative candidates would be Old Mutual and Prudential.
