Barclays Capital has named Aviva PLC (LON:AV.) and Prudential PLC (LON:PRU) among its 2018 top picks of the European insurance sector, having turned more bullish on the industry.
“A ‘goldilocks’ economy should allow stable delivery of dividends; meanwhile fundamentals are improving for the reinsurers,” said Barclays in a 100-page note.
READ: Aviva lifts earnings, cash and dividend targets after successful turnaround
“We expect prices to improve after record cat losses, helping premium growth and profitability.
“A quality bias should still be justified – the prospects of slightly rising interest rates may not be enough to drive earnings strongly, while static yields are less attractive.”
Quality counts
That ‘quality bias’ means Barclays remains positive on Aviva with an ‘overweight’ recommendation and 567p a share price target (currently 511p).
It reckons income investors should be bullish as the business, which recently announced it had £3bn of excess liquidity to deploy and so has the capacity to increase its dividends payments by double digits for “a number of years”.
The growth trajectory of Prudential, meanwhile, isn’t fully appreciated by the market, according to Barclays, which rates it ‘overweight’ with a price target of 2,161p (currently 1,845p).
“Prudential is our top pick in European insurance, [we] believe it to be the only large-cap long-term structural growth stock in European insurance, trading close to the sector multiple,” said the bank.