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Would Warren Buffett buy Aviva shares?

Edward Sheldon, CFA
close-up photo of investor Warren Buffett

Warren Buffett likes to invest in large, blue-chip companies. Looking at his portfolio, it’s clear he also likes the insurance sector.

Would he invest in FTSE 100 insurer Aviva (LSE: AV) though? Here’s my take.

Competitive advantage

One of the first things that Buffett looks for in a company is a competitive advantage, or ‘economic moat’ as he calls it. This protects a company’s profits. “The most important thing is trying to find a business with a wide and long-lasting moat around it,” Buffett has said in the past.

Now, looking at Aviva, I’m not convinced that it does have a strong economic moat. There are two main reasons I say this. Firstly, Aviva doesn’t have the same kind of reputation that other insurers such as Prudential and Legal & General enjoy. Having worked on a study on UK financial advisers last year, I can tell you that adviser sentiment towards Aviva is rather apathetic.

Secondly, the group seems to be lacking a clear strategy right now. Compared to Prudential (which is now focused predominantly on Asia) and LGEN (which has built a business model based around a number of major demographic growth drivers), Aviva is lacking direction.

This is well illustrated by the fact that a group of nearly 50 major city institutions recently demanded that Aviva present a credible plan to increase the long-term value of its shares. “If you didn’t exist, no one would create you now,” said top fund manager Richard Buxton of Merian Global Investors.

I’ll point out that Aviva did recently present a strategy update at its Capital Markets Day on 20 November and said that it plans to simplify the business. To my mind, however, it needs to do much more than this to be competitive.

All things considered, I don’t think Warren Buffett would be too impressed with Aviva’s economic moat.

High-quality attributes

Another thing that Buffett looks for in a prospective investment is high-quality attributes. He likes companies that have continually increased their dividends over time, have a low amount of debt, and that generate a high return on equity (ROE). Would Aviva meet Buffett’s high standards here?

Looking at Aviva’s financials, I don’t think it would. For starters, the company cut its dividend in both 2009 and 2013 so it doesn’t have a long-term dividend growth record. Secondly, its debt is relatively high. Finally, ROE is a little underwhelming, having averaged just 7% over the last three years versus 15% for PRU and 20% for LGEN.

Valuation

Of course, we know that Buffett also loves a bargain, and in this department, Aviva shares certainly look interesting. With analysts expecting earnings per share of 57.9p this year, its forward-looking P/E ratio is just 6.9. The yield on offer is also a high 7.7%. At that valuation, the stock looks attractively priced, in my view.

Overall though, I don’t think Warren Buffett would go for Aviva shares right now. Given the group’s lack of competitive advantage, I think he’d pass on the FTSE 100 stock and look at other opportunities.

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Edward Sheldon owns shares in Aviva, Prudential and Legal & General. The Motley Fool UK has recommended Prudential. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2019