The Aviva (LSE: AV) share price is up over 19% since the start of 2021. And the stock has increased by almost 35% during the past 12 months. I don’t think that’s bad for an insurance business that’s operating in what’s supposed to be a boring sector.
But the cheap valuation is too hard for me to ignore. The stock trades on a price-to-earnings (P/E) ratio of 7 times and has a dividend yield of almost 7%. I’d buy the shares now. Here’s why.
Core business
I think Aviva had lost its way. In my view, it was a case of little bit of this and a some of that. The business lacked focus. Well, that was before the new CEO, Amanda Blanc, came in last year.
She’s making progress where her predecessors had struggled. Her aim is to improve the growth and profitability of its core businesses. Under her leadership, Aviva has disposed of eight non-core assets. This will create £7.5bn in cash proceeds once the deals have been completed.
What’s more, she’s focused on reducing the overall debt position and delivering shareholders a good return. And so far it’s working. The company announced that it will be making a substantial capital return to shareholders. Details on this will be released by Aviva later on this year.
The general insurer is undergoing a transformation, which will take time. I’ll have to wait and see whether Blanc will be able to deliver the goods. But so far, I’m impressed by what she’s doing.
Dividend
I can’t mention the Aviva share price without going into some depth about the income. Just by holding the stock, I could receive a dividend yield of 7%. And as I said, the company has confirmed it will be distributing more capital to shareholders. I can’t complain about that.
Aviva isn’t the most exciting of businesses. It doesn’t have the growth of a tech stock. But what it does do is generate cash flow to pay out as income. I don’t expect stellar share price appreciation from this steady Eddy stock, but as long as it pays the dividend then most investors should be happy.
Broker views
I’m not the only one who’s bullish on the Aviva share price. Earlier this month, the investment bank, Citi, reiterated the company as its top pick within the European insurance sector.
It reckons that the successful deployment of excess capital over time could result in significant upside. I guess time will tell but its analysts have lots of conviction in the company.
Risks
Of course, the shares do come with risk. The dividend isn’t guaranteed and it’s still unclear how the surplus capital is going to be distributed. It could be a one-off payment or share buybacks.
But we even don’t know how much is going to be returned to shareholders yet. If this is a small amount, investors may be disappointed, which could impact the Aviva share price.
But I’m hopeful that the board have the stockholder’s best interests in mind. And the company is making good progress, hence I’d buy.
