If youre building a diversified portfolio of stocks, youre quite likely to own shares in Aviva (LSE: AV) (NYSE: AV.US), Standard Life (LSE: SL) or Prudential (LSE: PRU).
These firms all have geographically diversified operations, and should be good long-term income buys but they arent all equal.
In this article, Ill take a look at the outlook for all three, and explain which one Id buy today and why.
Income matters
In my opinion, dividend income and yield are a key attraction of insurance stocks: a well-run insurance company should generate surplus cash.
From big cap heavyweights such as these, I expect a reliable, progressive dividend that keeps pace with inflation preferably with an above-average yield.
Heres how the picture looks at the moment:
Aviva |
Standard Life |
Prudential |
|
2015 forecast yield |
3.7% |
4.6% |
2.4% |
5-year average dividend growth rate |
-6.6% |
+5.5% |
+9.1% |
In my view, Standard Life is the most attractive option here: the high yield is likely to compensate for Prudentials faster growth.
Aviva does poorly, thanks to its track record of dividend cuts, most recently in 2012 and 2013.
Is the price right?
The insurance sector has been on a strong run over the last couple of years: Aviva has gained 89%, Prudential 64%, and Standard Life 48%.
After such big gains, its important to look at valuation are these shares still attractively priced?
Aviva |
Standard Life |
Prudential |
|
2015 forecast P/E |
11.4 |
16.9 |
15.3 |
2015 forecast earnings per share growth |
2.5% |
77% |
27% |
Standard Life looks the most expensive, despite the massive increase in earnings per share thats expected this year from organic growth, and last years acquisition of Ignis Asset Management.
In contrast, Aviva looks cheap, while Prudential is somewhere in the middle although with sure-footed chief executive Tidjane Thiam about to leave, it may pay to be cautious. Is the Prus breakneck growth about to slow?
Profit margins
Its easy to focus on P/E and yield, without considering how profitable a company is, but this can be a mistake: a company that generates higher returns can often sustain a higher valuation.
Aviva |
Standard Life |
Prudential |
|
2014 operating margin |
6.1% |
4.0% |
4.4% |
Prudential and Standard Life look similar, but Avivas operating margin of 6.1% is significantly higher. Ive been impressed by Aviva chief executive Mark Wilsons focus on cash generation and profitability and the firms 2014 results confirmed my faith in Mr Wilsons plans.
Todays best buy?
Each of these firms has something to offer, but my choice to buy today would be Aviva, which offers a reasonable yield and is valued at a significant discount to its peers.
Avivas recovery may yet falter, but Im happy to continue to trust Mr Wilsons ability to transform the firm into a growing, profitable and cash generative operation.
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Roland Head owns shares in Aviva. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.