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3 Great Reasons Why Aviva plc Is Set To Take Off

Today I am looking at why I believe Aviva (LSE: AV) (NYSE: AV.US) is an intriguing proposition for investors chasing high-risk stocks with potentially lucrative rewards.

A tempting all-round selection

Aviva is a popular pick for investors seeking strong total shareholder returns. City analysts expect the company’s recovery strategy to yield earnings of 42.2p per share in 2013, swinging from losses per share of 15.2p last year. And earnings are predicted to rise an additional 10% in 2014 to 46.5p.

These projections leave the company dealing on a P/E rating of 9.7 and 8.8 for 2013 and 2014 respectively, entrenched within the bargain area below 10 and suggesting that the firm is due a positive re-rating. A significantly higher forward reading of 14.2 for the whole life insurance sector backs up this theory.

Additionally, Aviva is also touted to produce above-average dividend yields for this year and next, even if the business’ decision to rebase the dividend in March — and consequent effect on future payouts — is likely to result in a further drop in the final payout this year. A payout of 15.5p is expected for 2013 versus 19p in 2012, although dividends are expected to resume an upward path next year, to 16.5p.

Still, the insurer currently carries dividend yields of 4% and 4.2% for this year and next, comfortably above the 3.2% FTSE 100 average. I am expecting yields to tick higher further ahead as earnings gradually improve.

New business continues to take off

Aviva announced last month that the value of new business across the group jumped 17% in January-June, to £401m. This was underpinned by a 16% rise in new business value in the UK and Ireland, to £211m, although performance in its markets abroad remains patchy.

Still, Aviva has concocted a plan to resuscitate operations at its underperforming Italian, Spanish, Irish and Aviva Investors divisions, while it is also looking to charge activity in the exciting markets of South East Asia, China, Poland and Turkey to underpin future growths.

Cost reduction plans making hay

Aviva’s cost-reduction scheme also continues to yield rich fruit. Operating expenses dropped an impressive 9% in January-June, to £1.53bn.

And the firm believes that it is in good shape to deliver additional cost savings, achieved through its strategic focus towards digital and automation, while significantly lower restructuring costs through to end-2014 should also boost earnings. These costs dropped 10% in the first six months of 2013, to £164m.

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> Royston does not own shares in Aviva.