Three years ago, I was far from shopping Aviva (LSE: AV) shares. I was putting in my SIPP and it was a toss-up between Aviva and a competitor FTSE 100 insurance and property manager Legal and General Group (LSE: LGEN).
Both looked good value, with price-to-earnings (P/E) ratios of six or seven. Both had been underperforming for years. Both seem ready to get the belt back.
Inflation was still going on at that time. The CPI stood at 10.3% in February 2023, not far below the peak of 11.1% last October. Higher interest rates and the cost of living crisis weighed on the FTSE 100, which stood at 7,878. But investing is cyclical. I heard that prices can’t stay that high forever. When they fall, UK stocks, especially high yielding stocks, will look more attractive than boring old bonds and cash. That was the theory, anyway.
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FTSE 100 sector competitors
At the time, investors could earn a risk-free yield of 5% or more, so many felt there was little need to risk money by investing in stocks. I had a different idea. Aviva was yielding 7.5%, while Legal & General gained 10%, with the potential for higher capital growth as their shares recovered. Faced with that choice, I bought Legal & General, lured by the incredible income.
By and large, my theory proved correct. Prime rates have dropped from 5.25% to 3.75% and look set to drop further. Bond yields and savings rates followed. The FTSE 100 is now trading at around 10,780, up 36% in three years. With dividends, the total return increases by 50%.
High-yield funds have surged, particularly Aviva, which is up nearly 50% in three years and 30% in the past 12 months, with all returns higher. Other FTSE 100 dividend paying funds in my portfolio, Lloyds Banking Group, IM&G again Phoenix Group Holdings share price they went up again. Sadly, there was one clear omission: Legal & General. That’s the bit I’m wrong about.
Its shares are up nearly 12% in the past year and up 5% in three years. Yes, investors pocketed a lot of cash in dividends, but they would have received almost as much as Aviva, and enjoyed capital growth funds.
Legal and general failure
I can’t complain too much. I’m sitting on a few big winners and there’s no finish line in investing. I plan to hold these stocks for at least the next ten years. Legal & General has time to make up for lost ground. Like I said, investing is cyclical.
Aviva looks pretty good after its strong run, with a trailing P/E of 26.7 and a yield cut to 5.4%. Legal & General’s trailing P/E stands at 92, which seems odd but reflects a double-digit sequential decline in earnings per share (which also explains its weak share price). The trailing yield remains flat at 7.9%.
In the future, the picture looks calm. Aviva trades at a trailing P/E of 11.9 for 2026, with Legal & General at 11.3. Forward yields of 6.36% and 8.35%, respectively, still look very good.
So should I buy Aviva now? It was a better bet three years ago and may still be marginal. It has momentum and is into sharp business. If I was starting over, it would be my first choice. But I’m still sticking with Legal & General, hoping my patience will be rewarded in the end. Investing is cyclical, they say.
