The dominant force shaping equity markets is the mergers and acquisitions boom. As a result, company valuations have diverged to form a traditional bell-shaped curve. On the far right-hand side are the megacaps (such as Shell), whose share prices have under-performed because they are seen as too big to be bought. In the middle are the over-bought ‘prey’, whose stocks have soared due to takeover speculation. And on the far left are the microstocks (sub-£50m market caps), whose p/e ratios are again cheap as many traders are not interested in businesses this size. So for cautious investors, the best strategy lies in selling the costly middle ground and moving the proceeds into better-priced mega and micro stocks. This stock is a case in point:
Tip of the week: Aviva (AV.), tipped as a BUY by Evolution Securities
The world’s fifth-largest insurance group, the company is very much a megacap ‘predator’ rather than prey. Indeed, it unsuccessfully tried to buy Prudential last year in an £18bn all-share deal.
The group employs 58,000 staff, serving 35 million customers worldwide. Its main activities are long-term savings, fund management and general insurance. Its other main brands include Norwich Union, RAC and Morley Fund Management. Last year, the group delivered a solid set of results. Revenues from savings products rose 21% to £30.8bn, boosted by pension changes in the UK and stronger equity markets. The earnings per share, dividend and net asset value were all higher at 86.9p, 30p and 862p respectively.
Furthermore, the board believes that the outlook for UK savings remains positive; growth in 2007 is expected to come in at a healthy 5% to 10%. But this is chicken feed compared with opportunities abroad. Aviva is rapidly expanding in Asia and the US, where it bought AmerUs for £1.6bn in 2006. Asian sales leapt by more than 90% to £946m, while in the US, where the savings market is being driven by the baby boomer generation, turnover jumped 70% to £884m.
And last week, Aviva released record first-quarter revenues, up 18% to £9.2bn, driven by an “outstanding” performance in the US. For the full year the City expects 2007 sales, earnings per share and the dividend to be £31.7bn, 85.1p and 32.5p respectively – putting the shares on a prospective p/e multiple of 9.3 and paying a chunky 4.1% dividend yield.
Sure, there are risks, such as the group’s exposure to equity markets – but these appear to be overly exaggerated by the City. And with regard to the outlook, incoming chief executive Andrew Moss said last week: “Over the past two years in the UK, we’ve driven profitable growth by simplifying our infrastructure, managing costs and improving service. This focus will continue and we have more to do, but we’re now seeing the benefits of our strategy with increases in both sales and margin.”
With cash flow strong and the balance sheet robust – regulatory capital requirements are 1.8 times covered – the shares look a solid long-term buy.
Recommendation: GOOD VALUE at 792p