Head To Head: Prudential vs Aviva

Published in Investing on 10 October 2012

Which big insurer should you buy today?

In this series, some of your favourite FTSE 100 (UKX) shares go head to head in a three-round contest for superiority.

In Round 1, the firms fight on earnings; in Round 2, on dividends; and Round 3 is a battle of the balance sheets. The winner will be the company that has racked up most points at the end of the contest.

Stepping into the ring today are insurers Prudential (LSE: PRU) and Aviva (LSE: AV).

Some easing of eurozone worries of late -- whether justified or not -- has seen Prudential and Aviva outperform the FTSE 100 over the past three months. The FTSE 100 is up 4%, but Prudential's shares have risen 15% and Aviva's 13%.

Let's take our seats at ringside.

Round 1: earnings

Recent share price841p327p
Last year price-to-earnings (P/E) ratio13.219.2
Current year forecast P/E12.46.5
Four-year earnings per share (eps) compound annual growth rate (CAGR) (%)18-25
Current year forecast eps growth (%)631
Operating margin (%)8.65.2

Sources: Digital Look, Morningstar, company reports. Winners in bold.

The two companies take points tit-for-tat through the first round: Prudential scores on historic P/E and Aviva on forecast P/E; Prudential scores on historic eps growth and Aviva on forecast eps growth. Finally, Prudential edges the round by scoring on superior operating margin.

Round 2: dividends

Last year dividend yield (%)3.08.0
Current year forecast dividend yield (%)3.18.0
Four-year dividend CAGR (%)9-21
Current year forecast dividend growth (%)50
Forecast dividend cover2.61.9

Sources: Digital Look, Morningstar, company reports. Winners in bold.

Aviva makes a strong start to round two, scoring thumping points on dividend yield. However, Prudential fights back, taking points for dividend growth -- and scoring on superior dividend cover to again edge the round.

Round 3: balance sheet

Price-to-book (P/B) ratio2.30.7
Regulatory capital cover2.71.5

Sources: Digital Look, Morningstar, company reports. Winners in bold.

It's all square in the final round. Aviva takes the point for P/B. Prudential takes the point for regulatory capital cover -- or, to put it in more words, the ratio of the companies' capital or solvency surplus to the minimum level required by the EU Insurance Groups Directive.

At the conclusion of the contest, the companies have drawn one round and Prudential has won two. The overall points tally is: Prudential seven and Aviva five.

Post-match assessment

This was quite a finely balanced contest, with Prudential generally superior on growth measures and scoring strongly on the 'quality' fundamentals of margin, dividend cover and regulatory capital cover.

However, it's notable that Aviva took four of the five valuation-ratio points -- and by some margin. Aviva's ratings are not only very 'cheap' relative to Prudential's, but are also very cheap in absolute terms: forecast P/E of 6.5, historic and forecast dividend yield of 8%, and P/B of 0.7.

So, what we've seen in this contest is a fight between a company with quality business fundamentals and a company with classic value ratings. Aviva's value ratings have certainly attracted many fans, who will win big if the market's lowly opinion of the company proves unjustified.

Personally, I don't understand insurers or what the implications would be for their earnings, dividends and asset values in the event of another major shock to the financial system. As such, I'm following the motto 'if in doubt, do nowt'.

I'm in good company. Ace City investor Neil Woodford, who famously got out of banks and most other financial companies before the 2008 meltdown, continues to steer well clear them.

If you are interested in discovering where Woodford -- the man whose funds have beaten the wider market by over 300% in the last 15 years -- is currently putting his money, I recommend you check out the exclusive Motley Fool report 8 Shares Held By Britain's Super Investor". You can download the report for free right now. Simply click here.

Investing is by no means easy in today's uncertain economy. That's why we've published "Top Sectors Of 2012" -- our guide to three favourable industries for 2012 and beyond. This free report will be dispatched immediately to your inbox.

Further investment opportunities:

> G A Chester does not own shares in any of the companies mentioned in this article.

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The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

vinchainsaw 10 Oct 2012 , 12:09pm

Take out the negative five year growth forecast and Aviva wins by a landslide.

Who knows what things will look like in five years?
Five years ago England won the Rugby World Cup and Lehman's hadnt even yet collapsed.

Its fear of the unknown that is depressing the share price.

lameuse 10 Oct 2012 , 12:29pm

I agree Vinchainsaw. Like G A Chester, I don't understand insurers, however I have held some Aviva shares for at least a couple of years now and I intend to keep them for the long term.

apprenticeDRL 10 Oct 2012 , 2:15pm

Totally agree with the Aviva sentiment, I have held for a while now having purchased last year at sub 300. The dividend yield is very good and they run a SCRIP scheme so I am happy to hold at thye moment. My personal view on Prudential is that they are a bit toppy and the yield isnt great so the other insurer that I hold is RSA. Probably another 'higher' risk but again the yield is good.

duffmanchon 10 Oct 2012 , 4:12pm

RSA is a better pick in this sector with a similar yield to AV. It increased dividends over last 5 years whereas Aviva has cut or held them.

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