The February US non-farm payrolls data (due on 7 March, after this magazine went to press) will provide the clearest signal yet on whether the US economy is in recession or still teetering on a knife-edge. Economists are pencilling in a 25,000 rise for the month after January’s shocking 17,000 decline, with the unemployment rate nudging up to 5.0%. To me this is one of the most important (albeit lagging) indicators to guide your investment decisions. If the numbers are red, then GDP is shrinking and corporate earnings will suffer. During the last recession America lost 2.8 million jobs between February 2001 and August 2003, with unemployment topping out at 6.3%. If history repeats itself, I suggest lightening up on cyclical stocks (such as commodities and miners) that still assume strong growth, and instead recycle the proceeds into quality firms that have sound balance sheets but are already pricing in a recession. This stock falls squarely into the latter camp:
Aviva (AV), tipped as a BUY by Panmure Gordon
Aviva is the world’s fifth-largest insurer with 59,000 staff, 40 million clients and a market capitalisation of some £16bn. Its main activities are long-term savings, fund management and general insurance, under major brands such as Norwich Union, RAC and Morley and, of course, Aviva.
Last week, chief executive Andrew Moss reported a solid set of 2007 results, despite being whacked by £475m of losses caused by the worst UK floods for 60 years. Aviva still managed to post a 13% jump in its European Embedded Value (EEV – a key measure of profitability across the industry) to 772p per share. Furthermore the dividend was confidently lifted 10% to 33p, offering income seekers a 5.4% yield.
Aviva plans to leverage cross-selling opportunities and cut its costs. For example, it wants to grow its customer base to 50 million and scrap its regional brands in order to create a new integrated asset manager under the Aviva Investors name. This huge unit would then manage some £316bn (up from £287bn in 2006) in assets worldwide, allowing products to be rolled out more while slashing back-office expenses.
Moss commented that “although the external environment is uncertain, customers need the products we provide and our markets remain fundamentally attractive. We have a strong balance sheet and… aim to double earnings per share by 2012 (equal to 15% a year)”. As such, analysts have pencilled in 2008 and 2009 underlying earnings per share of 83.9p and 87.2p respectively.
There are risks, such as Aviva’s exposure to equities, but these look overplayed. The City is also worried about the direction of premiums, particularly if 2008 proves to another catastrophe-light year. But encouragingly, in the second half, Norwich Union pushed through rises in household and personal motor insurance by an average 7% and 6% respectively, without unduly affecting customer retention.
There are fears that Aviva may have been snared, like AIG, by the billions of pounds in toxic debts that had been dispersed around the world in complex structured products. Reassuringly, though, Moss added that Aviva “had only a minor exposure to subprime loans, representing 0.6% (or £1.9bn) of its total assets… It’s been a tough year, but financially we are very strong.” With the stock already trading on meagre p/e multiples of 7.4 and 7.1 for the next two years, Aviva offers solid long-term value.
As an outside chance, the group may also benefit from the deluge of recent hedge-fund closures, as institutions may shift back into cheaper, less volatile and more transparent managers.
Recommendation: GOOD VALUE at 605p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments