Many insurers still trade below their pre-Covid prices, and dividends are being restored.
The potential re-rating of European insurers as dividends normalise has led a City bank to boost its price targets on UK players including Aviva (LSE:AV.), Prudential (LSE:PRU) and Legal & General (LSE:LGEN).
Deutsche Bank believes there's further to go in the recovery of the sector, despite a sharp rebound in share prices over the last two months.
In absolute terms, the bank notes the sector still trades about 7%-8% cheaper than it did 12 months ago, although on a relative basis the gap is even wider.
Based on expectations for easing economic, Covid and Brexit conditions, an improved pricing environment and a return to well-underpinned dividends, the Deutsche research team said: “Looking forward to 2021 we believe further re-rating is possible.”
- My view on UK bank shares and dividend stocks
- Income prospects for 2021: fund and trust tips
- Three income trusts the pros are picking for 2021
A closer look at balance sheets concludes there should be no material concerns with regards to dividend-paying ability. However, this assumes that regulatory attitudes towards dividends will be relaxed after many UK and European players were urged to show restraint on payments.
High-yielding Aviva was one of those to deal a blow to income investors when it pulled the plug on its £839 million final dividend in June, although Legal & General stuck by its payment.
Aviva has subsequently announced a new rebased dividend policy, starting with an interim payment of 7p a share due to land in shareholder accounts on 21 January. While future dividend growth may not be at historically high rates, the implied dividend yield is still a chunky 6%.
Deutsche Bank has lifted its price target by 50p to 425p on Aviva, which compares with 347.3p after today's 6% surge for the FTSE 100 stock. Aviva offers the biggest upside of all but one of the insurers in the bank's coverage, although it notes UK political risk remains a key threat.
The other UK players with ‘buy’ recommendations are Prudential, Legal & General and non-life insurer Direct Line Insurance (LSE:DLG), which has a target of 355p and currently trades with a forward yield in excess of 11%.
Prudential's target price has been increased from 1,400p to 1,510p, which if achieved would take the stock back to where it was prior to the pandemic sell-off. Shares were 5% higher at 1,448.5p during today's upbeat session for blue-chip stocks.
Pru investors are also coming to terms with a new dividend policy as adjustments caused by the separation of its US-based Jackson unit now mean a yield closer to 1%. Prospects overall are boosted by China's economy finding its feet as well as a reassuringly strong balance sheet.
- The staggering scale of UK dividend cuts in 2020 revealed
- UK dividends halve in third quarter, but green shoots emerge
- What Bill Ackman thinks will happen to stocks in 2021
- Take control of your retirement planning with our award-winning, low-cost Self-Invested Personal Pension (SIPP)
Legal & General, meanwhile, has a price target of 300p, which Deutsche Bank lifted by 15p in this week's note and contrasts with 272.8p after a 5% rise today. The forward dividend yield of more than 6% remains an invitation to income seekers after the distribution was left untouched in August's half-year results, unlike most of its competitors.
The company remains well-placed in the long-term savings market, driven by the increasing use of pension risk transfers by companies to the likes of L&G. At the same time, the annuities market has had a new lease of life and the resurgence of the equity release or lifetime mortgage market also plays to the company’s strengths.
Across Europe, Deutsche Bank notes the insurance sector currently trades on a 12-month forward price/earnings multiple and dividend yield of 10.8x and 5.7% respectively.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.