I hold both Aviva (LSE: AV) shares and Phoenix Group Holdings (LSE: PHNX) in my high-yield portfolio.
I bought the stocks for four key reasons, all of which still hold good, in my view. However, if I had to choose which one to invest more in currently it would be Phoenix Group.
The onset of a genuine major financial crisis remains a risk for both insurance sector stocks, of course. Another is that inflation and interest rates stay high, acting as a deterrent to new business.
FTSE 100 listing
The first reason I bought the stocks is that they are listed in the FTSE 100.
Although all the FTSE’s major indexes are highly regulated and monitored, the FTSE 100 is top of the list in this respect.
This is important for me, as I do not want any nasty accounting surprises wiping out one of my investments.
Aviva and Phoenix Group are in this category.
Poised for growth
The second reason is that both look poised for significant growth.
In Aviva’s case, CEO Amanda Blanc has divested non-core businesses and re-energised core ones since taking the top job in 2020.
Eight such businesses have been sold off since then, raising around £7.5bn. At the same time, its insurance, wealth, and retirement businesses have grown in the UK, Ireland, and Canada.
Its H1 results highlighted that it expects operating profit to increase by 5%-7% this year.
Phoenix Group’s H1 results showed a 106% year-on-year increase in incremental new business long-term cash generation — to £885m. It is confident it can deliver its new £1.8bn cash generation target this year.
For 2023-25, the target is now £4.5bn, which will provide a huge war chest for generating further growth.
In this category, though, Phoenix Group looks more promising, in my view. Analysts’ expectations are for its earnings, revenue, and EPS to increase respectively by around 84%, 37%, and 80% a year to end-2025.
For Aviva, the same indicators are forecast to rise by about 43%, 25%, and 44%, respectively, to the same point.
Undervalued compared to peers
The third reason I bought both was that they are undervalued compared to their peer group. Aviva’s price-to-book (P/B) ratio is 1.2, against Phoenix Group’s 1.4, Prudential’s 1.7, Legal & General’s 2.7, and Admiral’s 8.7.
So, both companies are very good value against the peer group average of 3.6, but Aviva is slightly more undervalued.
In terms of the fair value for each company’s shares, I applied the discounted cash flow (DCF) model. I used several analysts’ valuations as well as my own.
The lowest of the core assessments for Aviva was 33% undervalued, and for Phoenix Group was 28% undervalued.
In this category, then, Aviva looks better — so one category win for each company so far.
Big passive income generators
Both stocks pay high dividends, far outstripping the current average FTSE 100 yield of 3.9%.
Last year, Aviva paid 31p per share, giving a 7.5% yield based on the current £4.15 share price.
Phoenix Group paid 50.8p, giving an 11% yield based on the current £4.63 share price.
Dividend payouts and share prices will change, so affecting the yields on both. However, right now, Phoenix Group’s is much better.
Overall, in my checklist, it also wins two categories over Aviva’s one, with one drawn.
The post One dividend giant I’d buy over Aviva shares appeared first on The Motley Fool UK.
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Simon Watkins has positions in Aviva Plc, Legal & General Group Plc, and Phoenix Group Plc. The Motley Fool UK has recommended Admiral Group Plc and Prudential Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
