South Africa-focused Old Mutual (LSE: OML) has followed the FTSE 100 down by 6% this year, while Aviva (LSE: AV) has fared better, adding 6% to its valuation.
On the face of it, Aviva has been a better investment in 2015. The market is currently taking a cautious view of Old Mutual, thanks to its ownership of a large South African bank and its heavy exposure to emerging market currencies.
These currencies have generally been falling in value in 2015, meaning that profits earned abroad translate into lower profits in the UK. There are also concerns about the strength of the South African economy, which has been hit quite heavily by the mining downturn.
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Contrast that with Aviva. The majority of its operations are in the UK and Europe, yet despite this, Aviva is expected to report flat profits this year. Meanwhile Old Mutual is expected to report a sizeable rise in earnings.
Is it time to switch your attention from Aviva to Old Mutual? Let’s look at how the two firms compare on valuation and income.
Valuation
Here’s how the two companies’ P/E ratings compare:
|
|
Old Mutual |
Aviva |
|
2014 historic P/E |
10.0 |
11.0 |
|
2015 forecast P/E |
9.4 |
11.0 |
|
2016 forecast P/E |
8.8 |
9.9 |
Old Mutual’s share price has fallen by 15% over the last six months, while Aviva’s has remained broadly flat over the same period. While neither company looks overly expensive, the market definitely appears to be discounting Old Mutual for its heavy exposure to African currencies.
Dividends
Insurance companies are popular income stocks and both Old Mutual and Aviva offer dividend yields above the market average:
|
|
Old Mutual |
Aviva |
|
2014 dividend yield |
4.9% |
3.5% |
|
2015 forecast yield |
5.3% |
4.1% |
|
2016 forecast yield |
5.7% |
4.8% |
Aviva’s dividend payout is still recovering from the cuts made in 2011 and 2012. This year’s forecast payout of 20.9p is still 20% below the 26p payout made in 2011. However, I’ve been impressed with Aviva’s newfound focus on cash generation and financial strength. As a shareholder, I’m cautiously optimistic that Aviva may finally be able to shed its reputation for regularly having to make dividend cuts.
Like many financial firms, Old Mutual was forced to suspend its dividend payout in 2009. However, dividend payments were resumed in 2010 and have since grown to last year’s total of 8.7p per share. Investing in Old Mutual provides investors with a higher yield opportunity than Aviva, while still remaining below the 6% level commonly seen as risky.
Best buy for 2016?
Both Aviva and Old Mutual delivered solid performances during the first half of the year. We don’t yet know how each firm’s full-year results will shape up, but by this point in the year any nasty surprises should have become apparent and been made public.
I continue to rate Aviva as an attractive long-term income play and own the stock myself. However, I’m tempted to say that at today’s prices, Old Mutual looks a more promising buy for its growth potential and a generous yield.
It’s worth remembering that Old Mutual is less than half the size of Aviva and operates in one of the world’s least developed financial markets. For investors with a long horizon, Old Mutual could be a smart buy in 2016.
