Why You Can’t Go Wrong With Aviva plc And Prudential plc

Every investor needs a selection of long-term, buy-and-forget stocks in their portfolio to provide a steady income, as well as capital growth without taking on too much risk. Aviva (LSE: AV) and Prudential (LSE: PRU) are two such investments. Both have a robust balance sheet, are well managed, operate in a long-term industry and offer attractive dividend yields. 

Set for growth

Prudential and Aviva are two of my favourite companies. Both are on my watchlist. In many ways, the two companies were built with the long-term investor in mind. Indeed, both have been around for more than a century and their primary lines of business — life insurance and retirement savings — guarantee recurring cash flows for decades. 

But while Aviva and Prudential operate within the same industry, they’re both very different companies. On one hand, Aviva dominates the UK pension and retirement savings market. On the other, Prudential is more of an international savings provider and asset manager. 

And an international presence has helped Prudential grow faster than its peers during the past five years. Prudential’s earnings per share have increased at a compound annual rate of around 26% since 2009. Over the same period, the company has hiked its dividend payout by approximately 13.2%. 

International markets such as Asia should continue to be a key growth driver for Prudential going forward. In particular, according to City analysts, demand for life insurance is set to grow by around 10% per annum within Asia during the next four years. Based on this forecast, City analysts currently expect Prudential’s earnings per share to grow 14% this year and a further 11% for 2016. 

What’s more, according to forecasts, Prudential is expected to hike its dividend payout by 10% per annum for the next two years. The company’s shares currently support a dividend yield of 2.8% and trade at a forward P/E of 12.6. 

Huge market 

As I’ve written before, Legal & General believes that over the next 15 years the value of savings in UK defined contribution pension schemes will nearly quadruple to approximately £3.3tn by 2030. Aviva should be able to capture a huge share of this market, as it is one of the UK’s largest long-term savings managers.

Steady growth in assets under management should push Aviva’s earnings higher over the long term, and the company is committed to returning excess cash to investors. For example, after completing its merger with Friends Life over the summer, Aviva now has an economic capital surplus of £10.8bn, up 35% from the figure of £8bn as reported last year. Further, it’s estimated that as a result of the Friends merger, Aviva’s cash flow will increase by an additional £600m per annum. 

With a robust balance sheet and capital surplus in place, Aviva’s management was able to hike the company’s dividend payout by 15% when it announced first-half results at the beginning of this month. Aviva currently trades at a modest forward P/E of 10.2 and supports a dividend yield of 4.3%. City figures suggest Aviva’s earnings per share and dividend payout will expand by 11% and 17% respectively next year.