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What’s Stopped Me From Buying Aviva plc Today

Today I am looking at Aviva (LSE: AV) (NYSE: AV.US) and deciding whether to add the insurer to my personal stocks portfolio.

Turnaround strategy yielding promising results

Aviva announced at the start of the month that its operating profits edged 5% higher in the first six months of the year, to £1.01bn, helped by a 9% reduction in operating expenses to £1.53bn.

Earnings have worsened in each of the past five years since the 2008/2009 credit crunch, although the company has initiated an ambitious transformation plan to address the issue of crumbling profits. The company has implemented strict cost-cutting measures to help get its financials back on track, including sizeable asset divestments and restructuring steps across the group.

Encouragingly, the level of new business surged during January to June, with values up 17% to £401m. New business value in the core UK market rose 16% between January and June, to £211m, while France, Turkey and Asia also reported massive leaps in new activity.

Financials expected to maintain uptrend

Indeed, City analysts expect Aviva’s transformation policy to turbocharge earnings from this year onwards. Losses per share of 15p last year are anticipated to swing back into positive territory this year, with earnings per share of 41p predicted. Earnings are then expected to march to 47p per share in 2014, a 13% on-year increase.

And the insurance giant currently trades on P/E ratings of 9.6 and 8.5 for 2013 and 2014 respectively. These readings represent massive discounts to the average prospective multiple of 14.1 for the life insurance sector and 16 for the FTSE 100.

Time to target other spectacular dividend stocks

Less encouragingly for income investors, Aviva is expected to follow last year’s full-year dividend dip, to 19p per share from 26p in 2011, with another drop this year to 16p per share. City brokers project that the payout will once again move higher next year, however, albeit to a marginally better 16.7p.

Still, these predicted payments come with yields of 4% and 4.2%, comfortably above the 3.2% average from Britain’s 100 largest firms. But dividends still lag the forward 4.5% readout for the entire life insurance sector.

Aviva warned in this month’s financials that its turnaround strategy is still at an early stage. And while the issue of increased competition across its key markets, and choppy results at its overseas operations, continue to hang heavily, I think that the firm’s recent upward momentum is still at risk of substantial pressure at some point. I for one will be looking for signs of a more concrete turnaround before stashing my cash in the insurance firm.

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> Royston does not own shares in Aviva.