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The Pros And Cons Of Investing In Aviva plc

Stock market selections are never black-and-white decisions, and investors often have to plough through a mountain of conflicting arguments before coming to a sound conclusion.

Today I am looking at Aviva (LSE: AV) (NYSE: AV.US) and assessing whether the positives surrounding the firm’s investment case outweigh the negatives.

Transformation drive keeps on delivering

Aviva printed yet another set of promising set of interims in November, revealing that new business values rose 14% during January-September, to £571m. While its key UK market kept ticking higher, up 5% to £302m, surging activity in France, and the growth markets of Turkey and Poland, grabbed the headlines. Business in these places surged 33%, 40% and 48% respectively.

In addition, the results showed the sterling work that its restructuring drive continues to deliver. Total expenses dropped 8% during the period, to £2.48bn, and the company said that it remains on course to slash the 2014 operating costbase by £400 million from 2001 levels.

Europe still needs fixing

Still, Aviva cannot escape the effect of both macroeconomic and industry-specific issues affecting its operations in some of the most fragile areas of Europe. In particular, Aviva continues to witness flagging fortunes at its Italian and Spanish operations — new business value collapsed 63% and 41% correspondingly in these places, to £19m and £7m.

The company is taking steps to address this problem, including withdrawing from unprofitable distribution accords and switching focus towards protection and unit-linked products. But such steps are likely to take some time to bed in before delivering a tangible revenue improvement.

Asset sales required to keep rumbling

Indeed, it is important to remember that Aviva is still at a very early stage in its restructuring plan. The company itself reminded investors in last month’s update that although it had “made progress in a number of areas, there remains much work to be done.”

The company successfully divested its US business in October for $2.6bn, beating earlier estimates by $800m and completing a crucial step in streamlining the business. And Aviva followed this up with the sale of its 39% stake in Italian life insurer Eurovita for €33m in November. But the insurer still has to keep plugging away to strip out its underperforming assets and keep its programme on track.

A bargain stock selection

Still, in my opinion the company’s share price does not reflect its ever-improving earnings outlook, and I believe that Aviva is a snip at current levels. The insurer is expected to record earnings of 43.8p per share this year, swinging from losses of 15.p in 2012, before advancing 9% next year to 47.7p.

These projections leave the company trading on P/E multiples of 9.8 and 9 for 2013 and 2014 respectively, far below a forward reading of 13.7 for the complete life insurance sector. Although Aviva still has much labour in front of it, I believe that the firm’s excellent progress so far in implementing its restructuring plan — not to mention its ability to keep new business rolling in the door, especially in emerging markets — makes it a great growth pick.

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> Royston does not own shares in Aviva.