When weighing up a potential investment, we always need to look forward rather than backwards. If you buy a stake in a business, it’s the future profits that count — and the stock market will value your shares based on future expectations.
With that in mind, it can be helpful to review what expert City analysts are expecting a company to earn in the coming years. These expectations can be compared to the share price, to give you a better idea of how the stock market is valuing the business.
Today I’m looking at the earnings per share (EPS) forecasts for Aviva (LSE: AV) (NYSE: AV.US), the FTSE 100 insurance giant. All my figures are courtesy of S&P Capital IQ.
Analysts expect Aviva’s profits to be 42p per share in the coming year. This estimate means that, compared to today’s share price of 344p, the market is valuing Aviva’s shares on a forward price-to-earnings multiple of 8.
The consensus then calls for Aviva’s earnings to jump to 45p per share for 2014 before climbing to 50p in 2015, an impressive 9% annualised growth. The data also indicates Aviva’s revenues grow by 6% for the period, albeit erratically, from £26bn to £30bn.
Aviva’s current valuation may seem cheap compared to these impressive expectations, but it seems the market is less-than-confident in Aviva delivering that growth. Investor confidence in Aviva was shattered in March, when Aviva slashed its final dividend by 44%. But will there be further casualties amongst Aviva shareholders, or are the market’s fears overdone?
While Aviva’s 4.4% prospective dividend yield is still impressive, if you’re looking for a more stable, higher-yielding investment, you may want to take a look at “The Motley Fool’s Top Income Stock For 2013.”
The Fool’s choice recently revealed its dividend would increase “at least in line with the rate of UK inflation”, and provides a market-beating 5.6% yield.
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> Mark does not own any shares in this article.