The Aviva (LSE: AV) share price is around 447p as I write. But in 2007, the stock topped 800p. And it has the potential to return to that level.
However, that decade’s financial crisis and credit-crunch caused the insurance and financial services provider’s stock to plummet. And by the spring 2009, it was flirting with 200p.
A patchy financial record
A lot has happened since then. But Aviva never got higher than about 550p. And the chart shows a multi-year range-bound pattern with the general direction of travel being sideways. Over the past year, for example, the shares are within a whisker of where they started.
But the company has become a fairly reliable dividend payer. For 2016’s trading year, it paid shareholders almost 31p per share. And City analysts forecast a payment of nearly 35p for 2023. However, there was a dip in 2019 when the payment decreased by almost 50%. But it came bouncing back in 2020 and has been rising ever since.
However, Aviva’s record for revenue, earnings and cash flow is all over the place. From one year to the next, those measures have been as likely to decline as they have to grow. And one reason contributing to that outcome might have been the firm’s programme of asset sales. Aviva has been flogging many of its foreign operations to concentrate on core geographies and businesses in Canada, the UK and Ireland.
But another reason for the erratic financial performance is likely to be the inherent cyclicality in the firm’s operations. Aviva’s business is exposed to the ups and downs of the general economy.
Recovery and growth
However, earnings look set to rise by around 39% in 2023. And that estimate suggests the business is recovering well from its pandemic-induced slowdown. Meanwhile, the forward-looking dividend yield is around 7.8% for 2023.
At first glance, a high yield suggests one of two possibilities. The first is that it’s a warning sign. And the payment may be unsustainable and due for a cut. But there’s little evidence of trouble immediately ahead for the business. In fact, recent communications from the company have been upbeat about trading and the outlook.
The second possibility is that the valuation for the business may be too stingy. And it’s possible the market could re-rate it higher.
However, because of its cyclicality, Aviva probably deserves a low-looking valuation. Nevertheless, I’m optimistic because the UK stock market appears to be gaining something of a reputation for good value among international investors. And if interest in Aviva increases, it’s possible for a rising share price to push the yield down.
My sums tells me a doubling of the share price to around 894p would halve the forward-looking yield to about 3.9%. And that doesn’t look unreasonable to me, as long as the business keeps performing well.
Of course, there’s no guarantee any of this will happen, or hint of a timescale. But I’m expecting decent, bullish general stock market conditions ahead. And that seems encouraging to me.
