The most obvious question for value hunters in the insurance sector is whetherAviva(LSE: AV)(NYSE: AV.US)is a steal right now. Well, I reckon its shares are fairly attractive, although they are not a bargain. Another question is whetherPrudential(LSE: PRU) will react to Avivas latest acquisition ofFriendsLife;I wouldnt bet such an outcome, but Prudential could be a decent investment on its own.
Given the uncertain surrounding the regulatory environment, it takes courage to bet on both Aviva and Prudential, I appreciate that, but at 480p/500p a share the Aviva investment could easily deliver a 15% pre-tax return, excluding dividends, in 2015. Prudential, meanwhile, could do even better if recent trends are confirmed.
Aviva: Too Risky For You?
Aviva is merging withFriendsLifein a multi-billion deal that could boost shareholder value, although the market doesnt believe the tie-up is in the best interest of Aviva shareholders. Aviva has been under pressure ever since the deal was announced in late November (-10% over the period), but short-termweakness in its stock price doesnt change the investment case over the medium term, in my view.
As I recently argued, assuming a very aggressive scenario for cost synergies, the combined entitys operating profitability will rise significantly, which will benefit cash flows and Avivas dividend policy. Aviva expects about 600m of incremental cash flow from the tie-up and it also expects to retain its coveted credit rating.
Investment and financing opportunities are few and far between, so defensive M&A could be the path to follow in the insurance sector. The shares trade about 15% below the average price target from brokers, as the recent Friends Life deal caught investors and analysts off guard.
Will Prudential Take Heed?
Prudential is a less risky bet than Aviva. It has delivered plenty of value in the last couple of years: its stock performance reads +62% over the period. Prudential doesnt need M&A, in my view.
The average price target from brokers has risen by 14% in the last 12 months and, at about 1,620p a share, is still 9% above Prudentials current stock price. Prudential could surprise investors in the next few quarters, of course.
Based on trading multiples, one may argue that Prudential stock looks fairly valued, but earnings and dividends should rise nicely in the next 12 months or so. Its valuation should continue to benefit from its geographical mix and growth prospects in Asia, a decent dividend yield as well as better returns than rivals. Whats not to like about it?
Well, a bottom-down approach in the sector suggests caution.
Elsewhere, I dont fancy any other players in the sector, and I appreciate you may be looking for value elsewhere, just like me!
If so, I urge you to consider a completely different sector: find out more about one producer — identified inthis FREE investment report–whose shares are up more than20%in the 10 weeks of trading, and whose value has risen180%in the last 24 months alone!
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