One sector that offers rich returns for income-seekers is life insurance. Ageing populations and the closure of defined benefit pension schemes mean more people need to save for their retirements. Enter Aviva.
The industry's immediate future is clouded by the ongoing eurozone crisis, but Aviva generates a third of its profits in Europe, holds £5.6bn in Italian sovereign bonds, and holds a further £1.3bn of debt spread across the rest of the periphery.
Barring a total eurozone meltdown, the shares look far too cheap, especially if the group continues to shed its underperforming divisions.
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Since Aviva cut its dividend in 2009, the board has been raising cash. In January, the group sold its Czech, Hungarian and Romanian life businesses to MetLife. That followed the sale of RAC to Carlyle for £1bn and the trimming of its stake in Benelux operator Delta Lloyd to 43% in 2011.
In April, the chief executive, Andrew Moss, indicated that he was open to offers for its American unit in a deal that could bring in proceeds of up to £1bn. The division accounted for 8% of Aviva's £2.5bn operating profit last year, but it needs to set aside large amounts of capital to continue sellingits fixed indexed annuities, which offer guaranteed returns.
Aviva (LSE: AV), rated a BUY by Oriel Securities
Any disposal would bolster the insurer's capital base and would come before the 2014 introduction of new Solvency II rules in Europe (the industry fears this legislation could make it impossible for EU-based insurers with operations in the US to compete effectively with domestic rivals).
The City is forecasting turnover and underlying earnings per share (EPS) of £30.6bn and 57p respectively. That puts the stock on a p/e of 5.5 and an 8% yield (twice covered). I value the company at its February net asset value of 457p a share.
The financial regulator's new retail distribution review, which has banned commissions for advisers, comes into effect at the end of this year, and its impact on the industry remains uncertain. And the company is exposed to the risks of volatile investment returns, increasing longevity and counter-party risk. Nonetheless, after last Friday's boardroom spring-clean, the shares are overdue a bounce. Oriel Securities has a target price of 640p, with the next trading statement due out on 17 May.
Rating: BUY at 310p
Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments. See www.moneyweek.com/PGI or phone 020-7633 3634.
Paul gained a degree in electrical engineering and went on to qualify as a chartered management accountant. He has extensive corporate finance and investment experience and is a member of the Securities Institute.
Over the past 16 years Paul has held top-level financial management and M&A roles for blue-chip companies such as O2, GKN and Unilever. He is now director of his own capital investment and consultancy firm, PMH Capital Limited.
Paul is an expert at analysing companies in new, fast-growing markets, and is an extremely shrewd stock-picker.
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