Aviva plc (AV), RSA Insurance Group plc (RSA): Who’s The Better Play?

LONDON — Insurance companies tend to appeal to investors seeking a reliable dividend income. Given that both Aviva plc (LON:AV) and RSA Insurance Group plc (LON:RSA) have cut their dividends this year, I’ve been wondering which of these two firms offers the best income prospects over the next few years.

Aviva vs. RSA Insurance
I’m going to start with a look at a few key statistics that can be used to provide a quick comparison of these two companies, based on their last published results:

	Aviva	RSA Insurance
Trailing dividend yield	5.9%	6.5%
Price to book value	1.16x	1.12x
Price to tangible book value	1.7x	1.88x

The first thing to note about these figures is that they don’t show the full impact of the firms’ dividend cuts. Both companies cut their final dividends for 2012 and indicated that cuts of the same size will be made to their interim dividends in the current financial year.

In the table below, I’ve indicated the yields that may be available once the interim cuts are announced.

It’s also worth noting that both firms are now trading above their book values. A year ago, Aviva plc (LON:AV) traded well below its book value, but the firm’s program of asset sales has reduced its book value from 435 pence to 278 pence in the space of a year, bringing Aviva’s valuation into line with that of RSA Insurance Group plc (LON:RSA).

What can we expect this year?
If you were to buy shares in Aviva or RSA today, what dividend yield could you expect for the current year?

As I write, Aviva plc (LON:AV) shares are trading at 324 pence and RSA Insurance Group plc (LON:RSA) shares are at 113 pence. I’ve calculated both firms’ likely dividends for 2013 and worked out the forward yields at these share prices, along with the size of the cut from the 2012 payout.

I’ve also gathered together some consensus forecasts for each company’s earnings for the current year — although analysts’ forecasts are notoriously unreliable, FTSE 100 companies generally get the benefit of the most comprehensive analysis and tend to deliver fewer surprises than smaller companies.

	Aviva	RSA Insurance
Forecast P/E ratio	7.5	9.4
Forecast dividend yield	4.5%	5.4%
Forecast dividend growth	-23%	-16%
Forecast earnings growth	10%	26%

RSA Insurance Group plc (LON:RSA) now offers a clear advantage in terms of yield — its 5.4% prospective payout is 20% greater than the 4.5% on offer from Aviva plc (LON:AV).

It’s worth remembering that Aviva is still an incomplete turnaround story — and with a forward P/E of just 7.5, its shares are priced to reflect the risk that there may be more problems ahead.

However, both companies look cheap against the wider FTSE 100, which has a forward P/E of 15.8.

Which share should I buy?
As an Aviva plc (LON:AV) shareholder, I’m holding. I don’t think either company has a big enough advantage to justify the cost and risk of a switch, and I believe that in time, Aviva will make a decent recovery.

If I was a new investor choosing between Aviva and RSA Insurance Group plc (LON:RSA) today, I would probably go with RSA, as its more stable situation, higher yield, and stronger earnings growth would give it the edge.

The best FTSE 100 dividends?
Aviva plc (LON:AV) and RSA Insurance are both tempting income buys, but there are a number of other attractive, high-yielding alternatives elsewhere in the FTSE 100 you may also want to consider.