I’ve been keeping a close watch on Aviva (LSE: AV) shares for a couple of years and expected to pop them into my portfolio at some point. Instead, I bought a much smaller rival, in the hope it has bigger growth prospects.
Aviva tempted me for several reasons. The obvious one is the income, with a forecast yield of 7.3%. The dividend looks set to grow steadily even though it’s covered just 1.3 times by earnings. Shareholders can look forward to a total dividend of 33.4p per share for full-year 2023, up 7.7% from 31p in 2022.
Aviva has promised investors “regular and sustainable” returns of surplus capital, which should include regular share buy backs.
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Big can be beautiful
The company’s now a much sharper operation, thanks to CEO Amanda Blanc’s overhaul. In 2022, it posted a 35% increase in operating profits to £2.21bn. It’s on course to meet its target of increasing operating profit by 5-7% this year, despite a surge in claims from Storms Babet and Ciaran.
As with a lot of FTSE 100 financials, solid profit growth has had precious little impact on Aviva’s share price, which is up just 0.07% over 12 months. Macro conditions have been bumpy, of course, and I’d expect a better return when interest rates start falling. That should make high-yielding stocks like Aviva look even more attractive as bond yields and savings rates fall.
The main reason I didn’t buy Aviva is that I already had a meaty stake in FTSE 100 rival Legal & General Group, and the two felt overly similar. Then a smaller financial stock caught my eye, FTSE 250-listed Just Group (LSE: JUST).
The annuity and equity release provider was ridiculously cheap when I bought it on 30 November, trading at just 4.2 times earnings. It listed on the London market in November 2013 only to be smashed by former chancellor George Osborne’s 2015 pension freedom reforms, which destroyed annuity sales by scrapping the obligation to buy one at retirement.
Just’s shares traded at around 269p four months after launch. I bought them for just 81.5p.
I bought for balance
The recent interest rate recovery has boosted retail annuity sales, which jumped 59% to £900m this year, but there’s a danger this will reverse when interest rates fall again.
Just is giving the big FTSE 100 insurers a run for their money in the bulk annuity market, which is growing nicely as companies offload their final salary pension obligations to insurers. This accounts for half of group revenues with full-year sales up 21% to £3.4bn.
The equity release lifetime mortgage market should also grow steadily as cash-strapped older homeowners unlock the capital in their property to fund their retirement.
After posting pre-tax losses in 2021 and 2022, of £21.4m and £317.4m respectively, the outlook is picking up, with CEO David Richardson targeting 15% growth in annual underlying operating profit.
With a market-cap of £888m against Aviva’s £11.9bn, I decided that Just’s shares could cut loose in a way Aviva probably never will. One downside is that the 2.2% yield is far lower than Aviva’s. It has only recently resumed its dividends, so with luck this should grow.
Only time will tell if I made the right decision. I’m not 100% sure, but that’s investing.
