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Aviva dividend pessimism drives downgrade by Barclays; Prudential 'top pick'

Aviva was downgraded to ‘equal weight’ as analysts now view excess distributions to shareholders as “significantly less likely”

Aviva plc -

Aviva PLC (LON:AV.) was downgraded and Prudential PLC (LON:PRU) selected by analysts as “top pick” as Barclays said the insurance companies can hold their ground amid persistent low interest rates.

The bank’s analysts like Europe’s insurers as they believe the sector continues to offer “above-average earnings and dividend visibility while valuation remains supportive”, overall seeing dividend yields on offer as “safe and attractive”.

READ: Aviva leaves investors underwhelmed with "slow burn" strategy

In their long-old battle against low interest rates, Barclays said the ongoing question around the viability of European savings business is “here to stay”, but felt the shift by companies to capital-light products “should continue to underpin earnings for now”.

Aviva was downgraded to ‘equal weight’ from ‘overweight’ in a note to the bank's clients on Wednesday, as analysts now view excess distributions to shareholders as “significantly less likely”.

Legal & General Group PLC (LON:LGR) is preferred for yield, as it is seen as able to grow underlying earnings per share by 10% and the dividend per share by circa 7% for the foreseeable future, “which makes it one of the most attractive names in the sector and significantly more appealing than Aviva, which is growing slowly and has no obvious catalysts”.

Based on Barclays estimates, L&G and Aviva’s dividend yields should cross over in 2023, given the differential in DPS growth.

The Pru is top pick in the sector, as the analysts see the company “as the only true large-cap growth stock in the space” after demerging its UK-focused M&G business in October.

Out of the FTSE 100 names, Pru offers “a cleaner and clearer investment case focused on the Asia compound growth story”, where the region accounts for almost 60% of operating profit and should help to drive a compound annual growth of 10% between 2018 and 2021.

“While Hong Kong and US interest rates are headwinds, we believe the remainder of the Asian machine should continue to support growth,” the analysts said, noting the stock trades at around 10 times forecast EPS, a discount to the sector’s 11x and the company’s historical multiple of circa 12x.

Quick facts: Aviva plc

Price: 292.3 GBX

LSE:AV.
Market: LSE
Market Cap: £11.48 billion
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