The finance sector has recovered significantly in 2015, but it’s by no means back to full fitness. There was never going to be a quick fix, and I reckon there’s a fair bit more recovery to come — from the insurance side at least, which was hit hard by the liquidity crunch.
Dividends were slashed by some, but they’re already starting to recover, with RSA Insurance on a prospective 2.6% yield for this year, followed by 3.3% next (after crashing to 0.5% in 2014). Old Mutual, which maintained its dividend, is expected to offer 4.7% and 5% this year and next, with Prudential (which also made no cut) on more modest yields of a little under 3%.
But my pick — and I’ll say up front that I own some — is Aviva (LSE: AV).
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Aviva shelled out 26p per share in 2011, giving an 8.6% dividend yield — but that wasn’t even half covered by that year’s earnings, and it clearly was not sustainable. The firm set out on a turnaround plan the following year, which commenced with a sharp haircut for the dividend — it was cut to 19p that year and then to 15p in 2013, but even at its lowest the yield didn’t drop below 3.3%.
Recovery plan
The rest of the plan involved a simplification of the business, concentrating on core areas, and a focus on significantly improving the balance sheet — Aviva did not want to be caught short again should the finance business take a dip. Three years on, and halfway through 2015, CEO Mark Wilson was able to report continuing, and impressive, performance — telling us that “we are now moving to a different phase of delivery” on the turnaround plan.
General insurance premiums were high again, the company’s underwriting profits were up by 45%, and its combined ratio reached an eight-year best of 93.1% (anything under 100% means an insurer is making profits from underwriting alone, regardless of its investment performance).
Net asset value was up 12% to 380p per share, and Aviva saw fit to lift its interim dividend by 15% — we’re on for a forecast 4.1% yield for 2015, followed by 4.8% in 2016, and the cash should be more than twice covered by earnings.
The third quarter showed more of the same, with Mr Wilson telling us that “We are maintaining the momentum of Aviva’s transformation with a further quarter of improved performance” — new business was up 25%, the firm’s acquisition of Friends Life had gone as expected, and cost savings were going well.
Shares still cheap
At 513p as I write, the share price is up 90% since the depths of 2012. But that still puts us on a prospective 2015 P/E of around 11.5, dropping to only 10.3 on 2016 forecasts. For a solid company that is still turning round its business and has what I see as a good future, a multiple so much lower than the FTSE 100‘s long-term average of around 14 says it’s just too cheap to me — especially with a strong and rising dividend.
The City’s analysts seem to think so too, as there’s a very strong Buy consensus out there.
