The market has been sceptical about insurance giant Aviva (LSE: AV) over the last two years, and the shares have lagged behind the market. I've used this opportunity top up my personal shareholding in this well-managed firm, which has looked too cheap to me.
Thursday's results suggest that the City is coming round to my point of view. Aviva shares rose by more than 6% in early trading after the group said that operating profits rose by 12% to £3,010m in 2016.
Shareholders will see their dividend rise by 12% to 23.3p per share. That's a yield of about 4.3% at current prices. There's also the promise of "further capital returns" in 2017, thanks to strong cash generation that's left Aviva with £1.8bn of "liquidity".
What about growth?
The main measure of financial strength for insurers is the Solvency II coverage ratio. This measures how much surplus capital an insurer has in addition to the minimum required by regulators. Aviva's Solvency II coverage ratio rose from 180% to 189% last year, giving the group plenty of headroom.
The firm plans to use some of this surplus cash to reduce debt levels. But this isn't simply a mature business in rundown mode. Aviva added £1,352m of new life insurance business last year, up by 13% from £1,192m in 2015. General insurance premiums grew by 15%, to £8,211m.
Is it too late to buy?
I've no plans to sell my Aviva shares. But are they still cheap enough to buy? Today's gains leave the stock trading on a 2017 forecast P/E of 10.3, with a prospective yield of 4.7%.
Although the shares aren't quite the bargain they were last summer, I'd be happy to top up at these level.
Shareholders have dodged a bullet
Kraft Heinz's offer for consumer goods group Unilever (LSE: ULVR) was firmly rejected, but it seems to have had a lasting effect on the group's share price. Unilever stock has risen by 18% over the last month and is now higher than it was when the Kraft offer was originally disclosed.
Personally, I'm very glad that Unilever's management stuck to their principles and shut the door on Kraft Heinz. I've owned Unilever shares for a number of years, during which they've delivered dividend growth averaging 7% per year, backed by free cash flow and modest levels of borrowing.
Kraft Heinz's plan to load up Unilever with debt and apply its own ruthless brand of cost cutting doesn't appeal to me. I don't believe it can maintain the kind of sustainable long-term growth for which Unilever is known.
The board has promised to review the options available to "capture more quickly the value we see in Unilever". The firm expects profit margins to be at the upper end of expectations this year and broker consensus forecasts have risen over the last month.
The surge of optimism means that Unilever shares are even more expensive than usual. The stock trades on a 2017 forecast P/E of 22, with a prospective yield of 3%. In my view the stock is fairly valued at this level, so I plan to hold and wait for a better opportunity to buy in the future.
Roland Head owns shares of Unilever and Aviva. The Motley Fool UK owns shares of and has recommended Unilever. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.