The Aviva (LSE:AV) share price has risen by mid-single-digit percentages during the past 12 months. This means that, based on current dividend forecasts, Aviva shares carry a high dividend yield of 7.9% for 2023.
This figure is more than double the 3.7% average for FTSE 100 stocks. And things get even better for 2024. Aviva’s yield marches to 8.1% for next year.
But the insurance giant doesn’t just provide excellent value from an income perspective. At current prices of 448p per share, it trades on a forward price-to-earnings growth (PEG) ratio of 0.4. Any reading below one shows that a stock may be undervalued.
Do these numbers make the company the best bargain on the FTSE 100 right now?
Bright forecasts
Of course cheap UK shares aren’t always a great investment. Some stocks trade at low cost because they pose significant risks to investors.
Having said that, City analysts are largely positive when it comes to Aviva. Brokers don’t always get it right but it’s always worth paying attention to analyst consensus.
Of the 17 analysts with ratings on Aviva shares, eight rate the company as a ‘buy,’ while the same number are neutral. Just one has placed a ‘sell’ on it, according to stock screener Digital Look.
A closer look at earnings forecasts indicates why the broker community is so bullish. Earnings are expected to rebound 23% this year before rising a further 13% in 2024.
Near-term risks
The short-term outlook for insurance companies has become more dangerous of late. And there’s a chance those earnings projections could come under increasing pressure as the British economy shrinks.
Demand for life insurance products can fall sharply during tough times. And Aviva — which generates the lion’s share of profits from its home market following recent divestments — is in particular peril versus some of its peers as economists tip a prolonged UK recession.
On the plus side, the general insurance market is more resilient during economic downturns. But Aviva’s profits here are in danger as claims inflation continues to rise. Direct Line Insurance Group’s decision to axe its dividend this week illustrates the huge pressure rising claim costs are creating.
Why I’d buy Aviva shares
Still, it’s my opinion that these dangers are more than reflected in Aviva’s share price. In fact, at current levels I’m considering buying the FTSE 100 insurer for my own portfolio.
The main appeal of Aviva to me is its ability to generate huge amounts of cash. A Solvency II ratio of 223% means the business should have the strength to pay big dividends even if trading conditions worsen.
The firm’s strong balance sheet has also led it to suggest a share buyback scheme could be launched in early 2023.
I also find the company’s shares attractive from a long-term perspective. I expect demand for its pensions and retirement products to grow as Britain’s population of older citizens expands. The Office for National Statistics thinks there will be 17m people aged 65 years or above by 2040.
I don’t have a bottomless well of cash to draw upon. But Aviva is one FTSE 100 share I’ll be looking to buy with cash to spare.
