What’s happening to the Aviva share price?

The Aviva share price has gained in 2021, but the stock is still on a low valuation and pays big dividends. Should I buy some more?

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Aviva (LSE: AV) has staged a strong recovery since the depths of 2020. Though it crashed harder than the FTSE 100, the Aviva share price is up 3.7% over the past two years. The index, meanwhile, is down 6.9%.

Aviva is suffering in Monday’s sell-off, mind, losing 3.5% at the time of writing. That puts it down with the bottom 20 Footsie stocks on the day, as energy fears are spooking the market. But anything that shakes our economic outlook is likely to damage the financial sector.

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Still, short-term shocks are good for long-term investors, right? So how does Aviva stack up as an investment right now? Well, I already have some and I’m definitely not selling. But I’m almost ready for my next share purchase, so should I buy some more?

Aviva share price valuation

Based on earnings in recent years, Aviva still looks good value to me. The pandemic year of 2020 actually didn’t damage profits much at all. In fact, after a bumper earnings rise in 2019, we saw only a modest 2% dip in 2020. On the current Aviva share price, we’re looking at a trailing P/E of a little over seven.

The 2020 dividend, if repeated this year, would yield 5.4%. But it’s already looking as if 2021 will beat 2020, after Aviva bumped its first-half dividend to 7.35p per share. That’s an increase of 5%. If repeated for the final payment, shareholders would pocket a 5.7% yield. I’ll be happy to take that.

At interim time, Aviva said it is “on track to achieve our objective of over £5 billion in cash remittances between 2021 and 2023.” So it’s not just a healthy short-term outlook here. No, the next couple of years look solid too.

Why so cheap?

If the company is looking good, why is the Aviva share price so low? I mean, that P/E multiple is only around half the FTSE 100’s long-term average. And the dividend yield is way ahead of the index too, with the Footsie set to yield around 3.7% this year.

Why the bearish approach from investors? It all seems to be about Aviva’s restructuring. A few years ago, institutional investors thought Aviva was looking a bit bloated and inefficient, and needed to streamline itself. Now it’s been doing exactly that, they’re still not happy.

I can see the problem, though. Aviva has been selling off a lot of overseas assets. Almost all, in fact, other than its Canadian and Irish operations. We’ve already seen what the big investors think of inward-looking finance sector companies, over at Lloyds Banking Group. They don’t appear to like them much.

Future cash flow

Aviva has plenty of cash through disposals. And, as well as dividends, some of it is making its way back to shareholders through share buybacks. I reckon that should keep the bottom line looking healthy enough for the next few years. But it does leave the question of where the cash will come from once the asset returns have been distributed and Aviva’s cash flow is coming only from day-to-day business.

I do like to see some safety margin to cover the uncertainty over the future. But on balance, I think the Aviva share price valuation is just too pessimistic. A top-up is a definite possibility.

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Alan Oscroft owns shares of Aviva and Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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