Over the last five years, Aviva (LSE: AV) (NYSE: AV.US) has disappointed investors and underperformed the market, falling by 25%, while the FTSE 100 has gained 21%.
However, recent months have seen Aviva’s new management, led by CEO Mark Wilson, take concrete steps to turn the company around and place it on a solid financial footing. Aviva’s share price has risen by 11.5% so far this year, matching the FTSE, but I believe that Aviva shares remain undervalued and could deliver significant gains in the next 6-12 months.
Undervalued
Aviva is still trading at a significant discount to its peers, suggesting that markets have not yet priced in a successful turnaround. Aviva currently trades on a 2013 forecast P/E of 9.7, compared to 10.6 for RSA Insurance Group and 14.5 for Prudential.
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Using analysts’ consensus forecasts for 2013 earnings of 42.9p per share, and a forecast P/E of 11, would give Aviva a share price of 471p — a 13% gain on today’s price.
I think this is a reasonable valuation, and I reckon that two events later this year could help trigger this re-rating.
Leaving the US
A key element of Aviva’s turnaround plan is the sale of the group’s US business.
Aviva has agreed a $1.8bn deal with private equity house Apollo Global Management, but regulatory issues have delayed progress and have forced Apollo to agree to special conditions, in order to get the deal approved by US regulators.
Things now seem to be moving again, and Aviva’s interim results in August confirmed that the sale of the US business is expected to complete by the end of the year. I believe that the removal of the uncertainty relating to this deal could trigger further gains for Aviva shares.
Dividend blues
Aviva’s 44% dividend cut went down like a lead balloon when it was announced in March, and the firm has since cut its interim payout by the same amount, giving Aviva shares a trailing yield of about 3.5%.
In my view, a return to progressive dividend increases could be the final trigger for the re-rating of Aviva’s shares. The question for investors is whether a modest increase to the final dividend will be possible this year.
Analysts’ consensus forecasts are indicating a full-year dividend of 15.6p, which implies an increase of 1p — or 11% — to last year’s 9p final dividend, taking the prospective yield to a reasonable 3.8%.
