The insurance sector has always been a favourite of mine, despite its cyclical nature. If youre good at timing (which Im not), maybe you can dip in and out between cycles, but I think a more realistic strategy is buy and hold for a couple of decades. That way, I reckon you can build up a decent overall dividend income.
I currently have a stake in Aviva (LSE: AV). Although fundamental valuations make the shares look like a screaming bargain, I have to say Im a bit twitchy when the market values a stock I hold on a very low P/E multiple. Based on full-year forecasts, Aviva is currently on a forward P/E of 6.5, which is less than half the FTSE 100s long-term average.
Thats come about from a collapse in the share price in the second half of the year, and Aviva is now down 27% year-to-date. The effect on the dividend yield is also remarkable, pushing it up to 8.2% on 2018 expectations, and 9.1% on 2019 forecasts.
Bearish view
Why are Aviva shares so cheap? Kevin Godbold has been pondering the same question, and he sees fears of the current cyclical insurance upswing breaking, together with market fears feeding upon themselves if investors fear a share price crash, theyll sell and increase the chances of a crash.
I dont see that it can be just fears of a sector downturn, as others are still on higher valuations. TakeRSA Insurance Group (LSE: RSA), whose share price has also fallen in 2018, but not as far. RSA shares have lost 20% of their valuation, but theyre still on a 2018 P/E level of 12.8, dropping to 9.9 on 2019 forecasts comfortably ahead of Aviva, but I think still in bargain territory.
Forecasts for RSA suggest dividend yields of 4.5% and 5.9% for this year and next, so theyve not been pushed to worryingly high levels.
Over five years, RSA shares have kept ahead of the Footsie too, gaining 21.5% against the indexs 2% drop. Aviva shares have performed badly over the same time, losing 17% of their value.
Whats wrong?
But if theres something specifically wrong with Aviva, I really cant see what it is. Aviva was one of the hardest hit by the financial crisis, and I do agree with Kevin that theres definitely cause for concern over the current downturn.
One possibility is that Aviva didnt manage to get in a few years of stable post-recovery progress before the latest Brexit-led economic clouds started to gather. And fears that the company might once again crumble are keeping sentiment firmly bearish.
Theres likely to be a lack of confidence in the dividend too, and I wonder if the company has been raising it a bit too fast. Having said that, Avivas dividend will have approximately doubled between 2013 and 2018, while RSAs will have actually risen slightly more than that and the bears are not out in the same force over RSA.
Out of favour
It looks to me as if insurance shares in general, and Aviva in particular, are priced for a massive economic meltdown, the likes of which would compete for effect with the banking crisis. But, whichever way Brexit eventually goes, I just dont see that.
So Im holding my Aviva shares, and Id consider buying RSA Insurance too.
Do you want to retire early and give up the rat race to enjoy the rest of your life? Of course you do, and to help you accomplish this goal, the Motley Fool has put together this free report titled “The Foolish Guide To Financial Independence”, which is packed full of wealth-creating tips as well as ideas for your money.
The report is entirely free and available for download today, so if you’re interested in exiting the rat race and achieving financial independence, click here to download the report. What have you got to lose?
