I bought Aviva (LSE: AV) shares and M&G (LSE: MNG) stock for three key reasons some time ago. Both still look good to me for the same reasons. But I am looking to increase my holdings in investment firm M&G for the year ahead, rather than insurer Aviva.
For both companies, a risk remains the onset of a genuine major financial crisis, of course. Another is that inflation and interest rates stay high, acting as a deterrent to new business.
Poised for growth
Both companies look poised for significant growth in 2024.
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In Aviva’s case, CEO Amanda Blanc has sold off eight non-core businesses since taking the top job in 2020.
Simultaneously, she has overseen growth in its insurance, wealth, and retirement businesses in the UK, Ireland, and Canada.
Its H1 results highlighted that it expects operating profit to increase by 5%-7% this year.
Analysts’ expectations are that earnings and revenue will respectively increase by 42.7% and 25.2% a year by end-2026.
M&G’s H1 results showed it is on track to achieve operating capital generation of £2.5bn by end-2024. This on its own can provide a powerful engine for further growth.
Analysts’ expectations are now for respective increases in earnings and revenue of 48.6% and 109.7% a year by end-2026.
Therefore, M&G looks more promising to me in this category.
Undervalued compared to peers
Both stocks also look undervalued compared to their peers.
Aviva’s price-to-book (P/B) ratio is 1.3, against Phoenix Group’s 1.5, Prudential’s 1.8, Legal & General’s 2.8, and Admiral’s 9. Its peer group average is 3.8.
M&G’s P/B is also 1.3, while RIT Capital Partners’ is 0.7, Burford Capital’s is 1.3, St. James’s Place’s is 3, and Wise’s is 11.3. The average of this peer group is 4.1.
So, based on the relative P/B undervaluation, M&G is slightly more undervalued than Aviva.
However, on a discounted cash flow (DCF) basis, the reverse is true. Given the assumptions involved in this, I used several analysts’ valuations as well as my own.
The lowest of the core assessments for Aviva was 42% undervalued, and for M&G was 39% undervalued.
In this category, then, Aviva looks slightly better overall — so one category win for each company so far.
Big dividend payers
Both companies pay high dividends compared to the FTSE 100 current average of 3.9%.
In 2022, Aviva paid 31p per share, giving a 7.2% yield based on the current £4.29 share price. However, M&G paid 19.6p, giving a 9.1% yield based on the current £2.15 share price.
Dividend payouts and share prices will change, affecting the yields on both stocks. However, right now, M&G’s is much better.
There is also every chance that it may increase this year in my view. Its interim dividend was 6.5p, compared to last year’s 6.2p.
If this increase was applied to the total dividend then this year’s payment would be 20.54p. At the current share price, this would give a yield of 9.6%.
Therefore, in my three-point checklist, M&G wins two categories and Aviva one.
