Are There 50% Upsides For Aviva plc And Old Mutual plc In 2016?

Will 2016 be a turnaround year for Aviva plc (LON: AV) and Old Mutual plc (LON: OML)?

| 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 banking and insurance sectors seem to me to house some rather nice bargains, and I think that’s largely because investors are still scared of the the finance business in general and the risks it might still hold.

Insurance is often cyclical too, and shares can perform quite poorly when people are in fear of global problems — we only need to look at the insurance companies that were knocked when markets opened for the New Year and trading in China was suspended after a 7% fall to see how people can overreact.

Low P/E, high yield

There are two in particular that look very good on fundamentals to me, and one of those is Aviva (LSE: AV) — and I’ve put my money where my mouth is on Aviva and have bought some.

Forecasts for the coming year would put Aviva shares, currently priced at 499p, on a P/E multiple of only 10, while the FTSE 100 average over the long term has been a bit over 14. On top of that, Aviva looks set to yield 4.8% in dividends, well ahead of the FTSE average, and I reckon that suggests a P/E of closer to 15 or more would be justified — which would imply a 50% share price rise to around 750p.

Supporting a substantial rerating is Aviva’s improving quarterly performance, with the firm well into its transformation strategy of firming up its capital position, reducing risk, and keeping costs down. There’s also a very firm Buy rating put on the shares by the City’s analysts — they’re not targeting a 50% rise just yet, but latest price targets suggest something around 650-700p.

Emerging market risk

Old Mutual (LSE: OML) is my other possibility, with its share price having taken a knock of late. It’s down 20% since late November, to 169p, and that gives us a forward P/E for 2016 of only a little over eight — with a well-covered dividend yield of 5% forecast.

Now, the reasons for the fall are clear and there is some rationality to them. Old Mutual focuses mainly on emerging markets and owns Nedbank, one of the largest banks in South Africa — and that makes the big institutional investors twitchy on two counts. It shows in brokers’ recommendations, with a far less bullish stance than Aviva and price targets suggesting a short-term upside of only around 20-25%.

But I think that’s fear-driven and over-conservative, especially after the firm’s third-quarter update looked pretty decent even in the face of tricky conditions in some markets. Forecasts have been cut back over the past 12 months, but only by a little, and there are still EPS rises on the cards for 2015 and 2016 — there could easily be a bigger upside here than the City currently thinks.

In short, I think we have two attractive income shares here, with strong growth prospects thrown in as a very nice bonus.

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.

Alan Oscroft 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

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

10% dividend growth! 2 FTSE 100 stocks tipped to supercharge cash payouts

These FTSE 100 stocks have strong records of dividend growth. And they're expected to keep on delivering, as Royston Wild…

Read more »

Investing Articles

Down 17% in a month and yielding 7.39%! Is this FTSE 100 share a screaming buy for me?

When Harvey Jones bought Taylor Wimpey last year he thought this FTSE 100 share was a brilliant long-term buy-and-hold. Has…

Read more »

Investing Articles

Here’s how I’m using a £20k ISA to target £11k+ in income 30 years from now

Is it realistic to put £20k in an ISA now and earn over half that amount every year in passive…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

If I could only keep 5 UK stocks from my portfolio I’d save these

Harvey Jones is running through his portfolio of top UK stocks to see which ones he couldn't bear to do…

Read more »

Midnight is celebrated along the River Thames in London with a spectacular and colourful firework display.
Investing Articles

I’m aiming for a million buying unexciting shares!

By investing regularly in long-established, proven and even rather dull businesses, this writer plans to aim for a million. Here's…

Read more »

Investing Articles

3 things to consider before you start investing

Our writer draws on his stock market experience to consider a few vital lessons he would use to start investing…

Read more »

Investing Articles

Will this lesser-known £28bn growth stock be joining the FTSE 100 soon?

As the powers that be plan a reorganisation of Footsie listing rules, this massive under-the-radar growth stock could find its…

Read more »

Investing Articles

Fools wouldn’t touch these 5 FTSE 350 flops with a bargepole – how come I own 3 of them?

Harvey Jones took a chance on three struggling FTSE 350 stocks in the hope that they'd stage a dramatic recovery.…

Read more »