3-Point Checklist: Should You Buy Aviva plc, Standard Life Plc or Prudential plc?

If you’re building a diversified portfolio of stocks, you’re quite likely to own shares in Aviva (LSE: AV) (NYSE: AV.US), Standard Life (LSE: SL) or Prudential (LSE: PRU).

These firms all have geographically diversified operations, and should be good long-term income buys — but they aren’t all equal.

In this article, I’ll take a look at the outlook for all three, and explain which one I’d buy today — and why.

Income matters

In my opinion, dividend income and yield are a key attraction of insurance stocks: a well-run insurance company should generate surplus cash.

From big cap heavyweights such as these, I expect a reliable, progressive dividend that keeps pace with inflation –preferably with an above-average yield.

Here’s how the picture looks at the moment:

In my view, Standard Life is the most attractive option here: the high yield is likely to compensate for Prudential’s faster growth.

Aviva does poorly, thanks to its track record of dividend cuts, most recently in 2012 and 2013.

Is the price right?

The insurance sector has been on a strong run over the last couple of years: Aviva has gained 89%, Prudential 64%, and Standard Life 48%.

After such big gains, it’s important to look at valuation — are these shares still attractively priced?

Standard Life looks the most expensive, despite the massive increase in earnings per share that’s expected this year from organic growth, and last year’s acquisition of Ignis Asset Management.

In contrast, Aviva looks cheap, while Prudential is somewhere in the middle — although with sure-footed chief executive Tidjane Thiam about to leave, it may pay to be cautious. Is the Pru’s breakneck growth about to slow?

Profit margins

It’s easy to focus on P/E and yield, without considering how profitable a company is, but this can be a mistake: a company that generates higher returns can often sustain a higher valuation.

Prudential and Standard Life look similar, but Aviva’s operating margin of 6.1% is significantly higher. I’ve been impressed by Aviva chief executive Mark Wilson’s focus on cash generation and profitability and the firm’s 2014 results confirmed my faith in Mr Wilson’s plans.

Today’s best buy?

Each of these firms has something to offer, but my choice to buy today would be Aviva, which offers a reasonable yield and is valued at a significant discount to its peers.

Aviva’s recovery may yet falter, but I’m happy to continue to trust Mr Wilson’s ability to transform the firm into a growing, profitable and cash generative operation.