Everybody likes a juicy yield, especially in todays low interest rate world, but you dont want overpay for the privilege. Are the following two income streams worth it, given rheir relatively high valuations?
Im a believer
Insurance company Aviva (LSE: AV) is a strange stock to analyse. Currently, it yields a generous 4.7%, but income seekers must be prepared to meeta toppy valuation ofnearly 19.7 times earnings. This is surprisinglyexpensive, given recent mixed growth. Aviva remainsa company on the mend, with chief executive MarkWilson working hard to turn around past under-performance, and markets seemto thinkhe hasnt quite got there yet.
I think markets are being a bit harsh, given thatAviva recentlyannounced a 13% increase in first-half operating profits to 1.3bn and hiked the interim dividend 10% to 7.42p per share. Itsfuture looks even brighter, with earnings per share (EPS) forecast to rise a whopping 92% this year, followed by a further12% in 2017. This reduces the forecast valuation to just 9.1 times earnings, which suddenlydoesnt look expensive at all. The yield is also forecast to rise to 5.2% and, better still, todays wafer thin cover of 1.1 is expected to swellto a more secure 1.9, making the dividend look more sustainable.
Wilson is building a leaner, meaner insurer, one thatis underpinned bya healthy Solvency II ratio of 174%. Avivahas also recoveredstrongly from its post-Brexitswoon and integrated Friends Life with aplomb. Theheadline numbers make Aviva look expensive, but closer examination suggests that it isa price worth paying.Im a believer in Aviva.
High standards
Rival insurerStandard Life (LSE: SL) combinesan even more seductiveyield of 5.2% with a yet more breath-takingvaluation of 25.7 times earnings. This is clearly a high maintenance, high reward stock. Yet its not consistentlyrewarding, with the share price down 10% over the last year. Like Aviva, Standard Life has picked itself up from the pieces of the EUreferendum wreckage. It has been boosted by the general burst of improved Brexit sentiment and warmly-received first-half results, showing an 18% rise in operating profits before tax to 341m, and a 10% leap inunderlying cash generation to 254m.
Investors also enjoyed a generous dividend uplift, rising 7.5% to 6.47p per share. ItsGroup Solvency II ratio is lower than Avivas at 154%, butwith surplus capital of 2.2bninvestors wont be too concerned.
The closer I look at Standard Life, the more it looks like Aviva. EPSare also forecast to grow 92% this year, slashing the forecast valuation to just 12.8 times earnings. Another 10% EPS growth is set to follow in September. Dividend coveris also set to pick up, from todays worryingly low 0.7 times to a rather more robust 1.3.
By the end of next year, dividend incomeis set to roll in at a rate of 6.2%. Standard Life is also exporting its fund management operation to emerging markets, which should offer long-term growth prospects as well. It is setting standards, so dont allowtodays apparently costly valuation distract you from that fact. The price is right.
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Harvey Jones 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.