One thing that puzzled me in the days after the EU referendum was why our top insurance shares were plummeting. All I could see at the time was a blind ‘sell anything to do with finance panic’ and since then I’ve seen nothing to change my mind.
Shock, panic!
I own shares in Aviva (LSE: AV), and I didn’t like seeing the price fall — by the Monday after the vote, my investment had lost 22% of its value.
What was particularly irksome was that the morning after the vote, Aviva had been one of the very first to give us its thoughts on the result, saying “Aviva has conducted extensive analysis of the possible implications of a vote to leave the EU and considers it will have no significant operational impact on the company.“
No significant operational impact, yet the shares still continued to slump the following Monday — does anyone really still cling to the nonsensical idea that the market provides an entirely rational evaluation of all known information and can’t be beaten by the sensible long-term investor? I knew I should have bought more, but I’m no less a victim of human emotion than anyone else, and I let the opportunity slip.
Anyway, since then, Aviva shares have recovered steadily, and at 447p they’re pretty much bang on their pre-vote price — the couple of months after the referendum was a great time for rational long-term investors to take money from emotional short-termers. But what now?
City forecasts for Aviva have been cut back very slightly since June, but the institutions are still backing the shares with a big buy consensus — and it’s not hard to see why.
The strong EPS growth predicted for this year and next would drop the P/E as low as nine on 2017 expectations, and dividends are expected to yield 5%-6% (and would be well covered). What’s more, we’re looking at PEG valuations of 0.1 this year and 0.7 next — a FTSE 100 insurer with a valuation that would be the envy of a small-cap growth prospect.
Second favourite?
Much of what I say about Aviva applies to Legal & General (LSE: LGEN) too — share price slump after the vote, and a quick update from the company. Legal & General wasn’t quite so unequivocal, but told us it had been prepared based on a 50-50 probability of a leave vote, and had reduced its balance sheet risk accordingly — and its forward-looking scenario was reassuring.
We still had a share price crash and another great buying opportunity, and as I write the shares are still actually 11% down on their pre-vote price at 210p.
We’re looking here at prospective P/E multiples of under 10 for this year and next, with predicted dividend yields of around the 7% mark. Those payments wouldn’t be quite as well covered as Aviva’s, but they still look comfortable enough to me.
And we’ve since had interim results from Legal & General, telling us of a 22% rise in pre-tax profit, a 24% boost to earnings per share, cash generation up 16%, and solvency measures looking very strong. Chief executive Nigel Wilson reckoned that the firm’s long-term growth drivers “remain unaffected and will continue to provide many growth opportunities.“
We long-term investors really should be making lemonade while the City institutions can do no more than suck on lemons.