3 Undervalued Picks From The FTSE 100: Barclays plc, Aviva plc and Direct Line Insurance Group plc

Barclays plc (LON:BARC), Aviva plc (LON:AV) and Direct Line Insurance Group plc (LON:DLG) are three contrarian ideas in the financial services industry.

| 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.

The financial services sector offers attractive contrarian opportunities, because of uncertainties surrounding regulations and market conditions. Weak market sentiment explains why the sector trades at relatively lower multiples on earnings. But, with the generally improving economy in the UK and strengthening consumer sentiment, the outlook for the sector is improving. Here are three FTSE 100 financial shares, which are trading at a discount to their peers:

Barclays

Barclays (LSE: BARC) has undertaken much restructuring since the financial crisis, by creating a non-core division to sell and run-off underperforming assets, including its European retail and commercial bank and some investment banking assets. Under Jenkins, Barclays has also been reducing the bank’s exposure to investment banking, as profitability lagged behind the rest of the bank and new regulations increase its capital requirements.

Retail and business banking in the UK, Barclaycard and its Africa banking units now generate about 87% of the group’s core profits, with the investment bank generating the remainder. The average return on equity (ROE) of these three non-investment banking businesses was more than 12% in 2014. However, the ROE for its investment bank fell to 2.7% in 2014, significantly lagging behind its US peers.

Should you invest £1,000 in Anglo American right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Anglo American made the list?

See the 6 stocks

Barclays, as a whole, only trades at 0.81 times its book value or 11.6 times its expected 2015 earnings. But improving market conditions should accelerate the run-off of its non-core division. And as the bank re-allocates capital to its core businesses, Barclays would come closer to meeting its ROE target of 12%. 

Aviva

Aviva (LSE: AV) has one of the lowest valuations in the life insurance sector, as it trades at a P/E of 10.7. Its shares also offer an attractive dividend yield of 4.1%. Although Aviva is more focused on slower growing UK and European markets, it benefits from its strong market position in the UK, which gives it scale and cost advantages.

Aviva’s recent acquisition of Friends Life increases its market share in the UK insurance and pension market, by bringing in around 5 million additional customers. The insurer expects to achieve cost savings of around £225 million per annum by the end of 2017. Friends Life has also bolstered Aviva’s balance sheet and increased its cash flow generation.

But this deal was completed as the government’s pension reforms have been introduced, which will likely lead to much reduced annuity sales. Nevertheless, strong life insurance demand should offset the decline in annuity sales, and the uncertainty surrounding annuity sales could represent a buying opportunity for Aviva’s shares.

Direct Line Group

Direct Line’s (LSE: DLG) earnings growth has been slowed by tough competitive conditions and rapid claims inflation, even as the insurer cuts costs. But there are signs that the market is bottoming out, particularly for UK motor insurance. Direct Line has also become more profitable by raising premium prices, even as it loses market share.

Direct Line is particularly attractive because of its dividend yield and the prospects for special dividends to be made in 2015. With the sale of its international division, Direct Line has yet to fully distribute the proceeds of the sale to shareholders. This has put the insurer in a position of excess capital. The company already pays a regular dividend of 13.2 pence per share, which equates to a 4.0% yield. But, analysts expect the insurer will pay special dividend of at least a similar amount to last year, which could boost its forward dividend yield to more than 8%.

Should you buy Anglo American now?

Don’t make any big decisions yet.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — has revealed 5 Shares for the Future of Energy.

And he believes they could bring spectacular returns over the next decade.

Since the war in Ukraine, nations everywhere are scrambling for energy independence, he says. Meanwhile, they’re hellbent on achieving net zero emissions. No guarantees, but history shows...

When such enormous changes hit a big industry, informed investors can potentially get rich.

So, with his new report, Mark’s aiming to put more investors in this enviable position.

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

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.

Jack Tang has no position in any 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

Investing Articles

These 4 FTSE shares have crashed hard. Which do I like today?

These four FTSE 100 stocks have plunged in value over the last month. But after this latest market meltdown, which…

Read more »

Investing Articles

1 FTSE 250 stock that analysts are calling a ‘Strong Buy’

The FTSE 250 can be overlooked by investors, but analysts believe this stock in particular could be undervalued by as…

Read more »

Close up of a group of friends enjoying a movie in the cinema
Investing Articles

I asked ChatGPT to name 5 FTSE shares for the perfect SIPP. Here’s what it picked

Harvey Jones called on ChatGPT to help him decide which shares would be right to buy for a well-balanced SIPP.…

Read more »

Investing Articles

Should I load up on Rolls-Royce shares after the 17% drop?

Rolls-Royce shares have pulled back sharply in the FTSE 100 in recent weeks, leaving this Fool to wonder if he…

Read more »

Investing Articles

Is this the best S&P 500 stock to consider buying in these volatile times?

With bullion prices still rocketing, I think buying the S&P 500's only gold stock is worth serious consideration right now.

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

Yielding 7.25% but with a P/E of 186x! What’s up with the BP share price?

Harvey Jones thought the BP share price was a brilliant bargain but it's only brought him a world of trouble.…

Read more »

Asian man looking concerned while studying paperwork at his desk in an office
Investing Articles

Down 26% with a 7% yield! Could this little-known FTSE 250 gem make a comeback?

Mark Hartley considers the long-term prospects of FTSE 250 recruiter Page Group. Weak results have sent the price tumbling but…

Read more »

Investing Articles

Analysts are calling Diageo shares a strong buy! Are they mad?

Analysts still have faith in Diageo shares, with 10 of them giving it the highest possible stock rating. Harvey Jones…

Read more »