2015 has been a very different experience for investors in Aviva (LSE: AV) and Provident Financial (LSE: PFG). Thats because, while Aviva is up just 1% year-to-date, Provident Financial has posted a stunning return of 45% since the turn of the year.
Looking ahead, however, it appears as though Aviva has the better prospects for capital growth. Thats at least partly because it is in the process of integrating the recently acquired Friends Life business, which is due to produce a significant amount of synergies as well as being a dominant player in the life insurance market. And, with the merger moving along as planned and Aviva stating that it remains confident in the ability of the company to deliver on its expectations for the deal, investor sentiment in Aviva could pick up over the medium term.
On this front, there is tremendous scope for an improvement. Thats because Aviva trades on a price to earnings (P/E) ratio of just 11.2, which is a substantial discount to a number of its insurance peers. Furthermore, with Aviva forecast to increase its bottom line by 12% next year, it trades on a price to earnings growth (PEG) ratio of just 0.8, which provides further evidence of a generous margin of safety.
Meanwhile, Provident Financial may be set for a more challenging period than has been experienced in recent years. Interest rate rises are on the horizon and, while they are set to be slow and steady, they are still likely to hurt consumer demand for new loans as well as make servicing existing loans more challenging.
Despite this, Provident Financial is forecast to increase its earnings by 21% in the current year and by a further 9% next year. Although this is an impressive rate of growth, much of it appears to be priced in since Provident Financial trades on a P/E ratio of 22.4 and has a PEG ratio of 2.3. Neither of these figures indicate good value for money, which means that Provident Financial may be fully valued.
Of course, Provident Financial remains a relatively high quality business which operates in a highly appealing niche. But, with its shares having soared by 387% in the last five years, it may be prudent for investors to look elsewhere for their long term capital growth.
As well as Aviva offering just that, it also has a forward yield of 5% despite paying out less than half of profit as a dividend. Therefore, rapid dividend rises could be on the horizon which, alongside a high income return, could act as a positive catalyst on the companys share price. As such, and while 2015 has been disappointing for investors in Aviva, buying now for the long term appears to be a very sound move.
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Peter Stephens owns shares of 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.
