Broker tips: Aviva, Tesco

The bank said it forecasts Aviva to deliver a best-in-class capital return yield, underpinned by a strong Solvency II ratio and the best free cash flow yield versus UK life insurance peers.

"We forecast £5.3bn of capital returns between 2023-26F, equivalent to 51% of Aviva's current market cap," it said.

"Our capital generation forecasts for 2025F (£1.69bn) are 10% ahead of consensus largely driven by our more positive outlook in General Insurance (GI)."

Jefferies said earnings should start to shift towards capital-light business, which is well-timed given improving market conditions, and should warrant a premium valuation versus peers.

Elsewhere, Shore Capital reiterated its 'buy' rating on Tesco after the retail giant's forecast-beating first half, saying that more upgrades could be possible if the company sustains its strong momentum.

Tesco announced earlier that adjusted retail operating profits would be in the range of £2.6bn-2.7bn this year, up from previous guidance of £2.6bn, with retail free cash flow expected to rise to £1.8bn-2bn, well ahead of the previous £1.4bn-1.8bn estimate.

Shore Capital said more upgrades could follow if the macro environment continues to improve and Tesco "sustains such recent execution" amidst a "gradually improving UK consumer economic backdrop".

"Tesco is a very well-oiled machine, pressing all the right buttons around price, assortment, promotion, availability and general service standards. That consistent execution is being noticed by shoppers and supports robust market share performances," said analysts Clive Black and Darren Shirley.

"In Central Europe, Hungary remains a challenge for Tesco, masking good progress elsewhere, one can hope for a better out-turn in FY25. Overall, we give all credit to management for this delivery."

The stock trades at 11.1 times current-year earnings, with a "handsome" free cash flow yield of 9.4%, while the two times covered dividend yield is 4.5%.

"Tesco is delivering on our cash compounding investment thesis, for which it deserves credit. On 11x FY24 PER, rating expansion should emerge, maybe substantially so. We happily reiterate our 'buy' stance."