Can Aviva Outperform Amlin?

LONDON -- If you're interested in building a profitable, diversified portfolio, then you will often need to compare similar companies when choosing which share to buy next. These comparisons aren't always as easy as they sound, so in this series, I'm going to compare some of the best-known names from the FTSE 100, FTSE 250, and the U.S. stock market.

I'm going to use three key criteria -- value, income, and growth -- to compare companies to their sector peers. I've included some U.S. shares, as these provide U.K. investors with access to some of the world's largest and most successful companies. Although there are some tax implications to holding U.S. shares in a U.K. dealing account, they are pretty straightforward and -- I feel -- are outweighed by the investing potential of the American market.

Today, I'm going to take a look at two of the highest-yield shares in the FTSE 350, Aviva  (LSE: AV  ) (NYSE: AV  ) and FTSE 250 member Amlin  (LSE: AML  ) , which specializes in commercial and risk insurance.

1. Value
The easiest way to lose money on shares is to pay too much for them -- so, which share looks better value, Aviva, or Amlin?

Value Aviva Amlin
Trailing price-to-earnings ratio (P/E)* 6.2 7.7
Forecast P/E 7.0 9.3
Price-to-book ratio (P/B) 1.1 1.4
Price-to-sales ratio (P/S) 0.2 1.1

*Based on normalized earnings -- excluding restructuring costs and losses from discontinued operations.

I used Morningstar's 2012 normalized earnings when calculating the trailing P/E ratios above, because Aviva took a 3.3 billion pounds writedown last year on the value of its discontinued U.S. business, plunging it into a full-year loss. Using normalized earnings provides more of a meaningful comparison between Aviva and Amlin.

Both of these companies look like a good value for your money, and while Aviva is cheaper on all metrics, its ultra-low price-to-sales ratio shows just how cautiously the market views the company, which is still in a state of transition. In contrast, Amlin is slightly more expensive but still looks like a good value, and offers a far more certain outlook. Both companies look attractive to me as value investments, but Aviva has an edge, as Amlin's share price has risen 28% over the last year, suggesting it may be fully valued for now.

2. Income
With low interest rates set to continue for the foreseeable future, dividends have become one of the most popular ways of generating an investment income. How do Aviva and Amlin compare in terms of income?

Value Aviva Amlin
Trailing dividend yield 6.2% 5.8%
5-year average historical yield 6.9% 5.9%
5-year dividend average growth rate -10.5% 9.9%
2013 forecast yield 4.8% 6.1%

Aviva cut its 2012 final dividend by 44%, and its recent results also signalled that the interim dividend would be "rebased" by the same amount, leaving its shares with a forecast yield of 4.8%. This is the third time since 2003 that Aviva has cut its dividend -- a poor record compared to that of Amlin, whose dividend has risen each year since 2003. However, I do agree with Aviva's management that reducing leverage and ensuring that the dividend is covered by earnings and cash flow is more important than maintaining a high payout. A huge dividend yield is not attractive if it is unaffordable.

In contrast, Amlin announced a healthy 4.3% dividend increase last year, which analysts expect to be repeated this year to give a forward yield of 6.1%. Amlin's dividend also looks likely to be well-covered by cash flow and earnings, making it a clear winner in this category.

3. Growth
Even if your main interest is value or income investing, you do need to consider growth. At the very least, a company needs to deliver growth in line with inflation -- and realistically, most successful companies need to grow ahead of inflation if they are to protect their market share and profit margins.

How do Aviva and Amlin shape up in terms of growth?

Value Aviva Amlin
5-year earnings-per-share growth rate n/a -5.5%
5-year revenue growth rate 1.25% 15.4%
5-year share price return -51% +52%

Amlin is a clear winner in terms of past growth, and shareholders have been well rewarded with a rich string of dividends and a 52% increase in the value of their shares over the last five years. Earnings growth has been less strong, and I suspect that looking forward, only modest growth is likely from Amlin, although investors' desire for high yield could cause its share price to rise further.

Aviva's situation is almost the reverse. While the company's share price and profits have dwindled over the last five years, it is now in the middle of a turnaround programme that could deliver solid improvements in its profitability and financial strength over the next few years. Such a result could deliver strong gains for patient investors, especially if Aviva manages to return to a policy of progressive dividend increases. Aviva is my pick in this category, thanks to its greater potential -- but it does carry greater risk, too.

Should you buy Aviva or Amlin?
U.K. insurance companies currently offer some of the highest yields available, and as a result, the category has remained popular with investors despite the financial crisis.

For income, Amlin appears to be a clear winner at present, but value and growth investors might prefer to take a chance on the long-term recovery potential of Aviva, which also continues to offer a near-5% yield, despite its recent dividend cut.

2013's top income stock?
Although both Aviva and Amlin are attractive income investments, the U.K. utility sector remains one of the best places to find reliable, high-yielding income stocks. But not all utilities are equal and some are facing serious challenges that could lead to dividend cuts.

The Motley Fool's top analysts have looked closely at all of the listed U.K. utility companies and identified one FTSE 100 utility share which offers a 5.7% dividend yield and which they believe may be undervalued by up to 20%. They are so confident in this share that they've named their report "The Motley Fool's Top Income Stock for 2013"!

This exclusive new report is completely free, but will only be available for a limited time -- so click here to download your copy now.


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