Full disclaimer straight off the bat, I already have a large proportion of my portfolio with AVIVA and have done so for several years. I’m ahead in share price valuation (up around 15% currently) but this has dropped in recent months. The dividends have been consistent and generous over the same period, so I have been satisfied with AVIVA. However, I need to do my due diligence and ensure they’re still a good investment both against their peers and in general.
So, as mentioned, this write-up is for me to confirm that my holding in AVIVA is still a good fit, currently, they’re my second biggest holding and are the only company I own in this sector. I intend to compare them to a few of their peers and as a result will do one of three things, perhaps buy some more, hold what I already have or maybe diversify and purchase one of AVIVA’s competitors (assuming the sector is still as investible as ever). As it stands I usually compare using basic metrics such as P/E, yield and dividend cover, market valuations etc. I’ll then add to this with research regarding recent news and the directions I think they may take going forward.
Today we’ll be comparing AVIVA (AV) with Phoenix Group (PHNX), Legal & General (LGEN) and Prudential (PRU) and deciding whether to make any changes to my holdings. The first thing to look into for me is to glance at the current yield, after all this is the main reason for investing in the sector.
DIVIDEND PAYMENTS
| Company | Yield | Dividend Cover |
| Aviva (AV) | 8.06% | -3.73 |
| Phoenix Group (PHNX) | 11.66% | -6.45 |
| Legal & General (LGEN) | 9.47% | 0.95 |
| Prudential (PRU) | 1.79% | 1.92 |
To summarise the above… Both Aviva and Phoenix Group can’t maintain the dividend payments if you just look at the above in isolation (but we won’t do that). The Legal & General isn’t covered particularly well and is also at a slight risk (again, if taken in isolation), and finally Prudential are covering their miserly (by comparison) dividend pretty well, the only issue here is that if Prudential were to increase their dividend yield too say 3% (which is still rather low) then they’d be down to about a 0.5 cover which is now not only worse than LGEN but also at greater risk.
So, back to why Aviva and Phoenix Group are in negative territory when covering the dividend payments or in LGEN’s case would appear to be at slight risk, this obviously comes down to companies making less money during the annual period and the main reason for this will be inflationary pressures in line with most other companies and industries. AV, LGEN and PHNX have increased their respective dividends this time in line with previous years commitments. This is likely due to them all viewing the reduction in profit as temporary. Now, this will also have an obvious impact on P/E valuations but just for completeness, see below.
PRICE-TO-EARNINGS
| Company | P/E |
| Aviva (AV) | -3.33 |
| Phoenix Group (PHNX) | -1.33 |
| Legal & General (LGEN) | 11.12 |
| Prudential (PRU) | 29.08 |
Now, this actually shows PRU being very pricey in comparison. Not just in this sector but pricey in general and this would be another warning sign for me, but I guess at least they’re in positive territory.
So, let’s try another good simple metric for assessing value, the trusty market-book-ratio
MARKET-TO-BOOK
| Company | Share Price | Book Val. Share Price | Variance | Var. |
| Aviva (AV) | £3.95 | £3.70 | 25p | 6% |
| Phoenix Group (PHNX) | £4.46 | £3.70 | 76p | 17% |
| Legal & General (LGEN) | £2.08 | £0.93 | £1.15 | 55% |
| Prudential (PRU) | £8.43 | £4.39 | £4.04 | 48% |
OK, so based on the market-to-book ratio none of these are smashing it in terms of value, but at least AVIVA is close to being at what seems like a fair price. The others all seem quite expensive, is this because the market feels a quick turnaround is imminent?
…Recent news-based web research coming up
Well, so far it’s a real mixed bag for me, the financial world is in a bit of turmoil and going by the above AVIVA are not bad value, not making enough money and are not even covering the cost of paying their dividend. However, when compared to the others they don’t appear too bad somehow. On top of this, with inflation looking like it’s stabilised and potentially on a downward trajectory (albeit slowly) and interest rates therefore likely staying higher (although not increasing) for longer are we in for another ‘newer-new-normal’? Time for some research.
After some research, I’ve come up with the below points.
- Firstly, AVIVA negatives
- Declining fortunes in the AVIVA wealth and retirement business of 13% to £436mn.
- The company has been selling assets in order to focus on the UK & Ireland, plus Canada. This at present seems generally positive but could lead to issues if these areas have a fall in circumstances.
- Large risks facing financial stocks at present. The poor economic outlook is creating uncertainty and we could still have a rocky couple of years ahead.
- AVIVA Positives
- The share price is actually lower than it was during the majority of the financial crash in the late noughties, the company today is in (arguably) a much stronger position however.
- The dividend is safe for another year thanks to the sale of its 25.9% stake in Singapore Life Holdings to Sumitomo Life Insurance Company.
- H1 results released on 16 August, AV stated that they expect operating profit to increase by up to 7% this year.
- A combination of rate rises and new business in its general insurance area increased operating profit by 29%, this largely offset a decline in its wealth and retirement business of 13%.
- Secondly, the Phoenix Group negatives
- As above, large risks facing financial stocks at present. The poor economic outlook is creating uncertainty and we could still have a rocky couple of years ahead.
- Dividend cover appears to be a high risk this year….
- and the Phoenix Group Positives
- HY balance sheet sees £885m of new business which is more than double its previous year, this covers the dividend comfortably.
- A higher dividend than its peers.
- A commitment from the board that dividend payments are expected to increase for the next couple of years.
- Expecting to deliver at the top-end of their 2023 cash generation target (£1.3bn-to-£1.4bn), and on track to deliver a 3-year 2023-25 cash generation target of £4.1bn.
- HY balance sheet sees £885m of new business which is more than double its previous year, this covers the dividend comfortably.
- Next the Legal & General negatives
- Earnings per share down from approximately 9.5p in 2022 (HY) to slightly more than 5p at HY 2023.
- Interim dividend of 5.71p, up 5% (HY 2022: 5.44p), I’ve placed this as a negative as they’re not earning enough to cover the cost in this instance.
- Earnings per share down from approximately 9.5p in 2022 (HY) to slightly more than 5p at HY 2023.
- Legal & General Positives
- Interim dividend of 5.71p, up 5% (HY 2022: 5.44p), also placed as a positive, perhaps LGEN are confident that this is affordable in the longer term.
- The Prudential negatives
- New business profits for the recent nine months were up 37% year-on-year – down from 39% growth registered for the first six months of the year.
- Economic concerns and a potential slowdown in China could cause issues going forward as this is a big market for PRU.
- and finally the Prudential Positives
- Good growth potential in the longer term as it focuses on Asian and African markets, perhaps higher risk however.
- P/E ratio premium over LGEN and AV, could be warranted due to the growth potential of markets PRU is targeting.
- Good growth potential in the longer term as it focuses on Asian and African markets, perhaps higher risk however.
Conclusions
Well, I set out at the beginning of all this to look into AVIVA and whether they’re still a good fit for my portfolio. I also had in the back of my mind that I may purchase some more of them or one of their peers. However, It quickly became apparent to me (and I got bored) that I likely wouldn’t do very much based on the above.
With the exception being PRU, they all pay a similar dividend yield, with the 3 companies that pay a decent dividend all apparently struggling to maintain the amount (which I would expect to be short-term). Then beyond this, looking at the market-to-book ratio… none of them are particularly attractive, AV are the best but when combined with the dividend cover it’s negated.
I think for now and up until the next set of results I will take a wait-and-see approach, all of these four will be completing the annual statements in March and we may well have a much better view of the Chinese economy and whether the latest stimulus package can alleviate the pressure on their troubled property sector, if global inflation, interest rates and oil prices have stabilised and if European geopolitics have found a route through troubled times, these are probably the main concerns currently but I’ll hold my nerve and sit on my hands. Perhaps I’ll do another write-up at the end of March and make a decision then.