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

Investing Articles

Here’s the best-performing FTSE 100 stock of the last 10 years

Private equity firm 3i has outperformed the rest of the FTSE 100 over the last 10 years. And its big…

Read more »

Fans of Warren Buffett taking his photo
Investing Articles

Here’s why Warren Buffett is selling shares (and why I’m not)

Warren Buffett cited tax considerations as his reason for selling shares in Apple. But this isn’t something most UK investors…

Read more »

Investing Articles

What on earth is going on with the AstraZeneca share price?

The AstraZeneca share price has fallen 30% from its peak in August. Dr James Fox explains what’s going on with…

Read more »

Investing Articles

2 high-yield FTSE 100 shares I’d consider buying for passive income…and one I’d avoid

Some FTSE 100 stocks have eye-popping dividend yields. But will the passive income actually be dished out? Paul Summers takes…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

These 2 former stock market darlings are trying my patience! Time to sell?

Harvey Jones thought he was getting a bargain when he snapped up these too much-loved FTSE 100 dividend growth stocks.…

Read more »

Investing Articles

Here’s how I’d use £3,000 to target a second income that grows each year

Our writer explains the approach he'd take to trying to build a second income that gets bigger over time, by…

Read more »

Elevated view over city of London skyline
Investing Articles

Is it time to buy this incredible FTSE dividend share?

Christopher Ruane examines one FTSE 100 share with a phenomenal dividend history. Does a steep share price fall this year…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

This FTSE 100 share has just crashed another 20%. Its P/E is now just 9.9 so should I buy?

Harvey Jones was tempted to buy this FTSE 100 share after it crashed in October. Now it's crashed again, it…

Read more »