Down 17% from their March high, Aviva shares look a bargain to me

Down sharply from this year’s high, paying stellar dividends, and with a great growth plan, I think Aviva shares are a bargain buy.

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Aviva (LSE: AV) shares have dropped 17% from their 10 March trading high. Some of the recent decline has followed a broad-based drop in the FTSE 100. This has been largely driven by the toxic mix of high inflation and high interest rates in the UK.

Before that, though, two key factors weighed on the shares. One was legacy assets staying on the books long after they ceased to perform. The other was a lack of focus on what the main drivers of the business would be.

However, neither of these last two factors now apply, in my view. And there is much to recommend the stock, I think.

A FTSE 100 dividend leader

The most obvious positive is the stellar dividend payouts. As of 7 July, the company had a 2023 forecast dividend yield of just over 8%. This puts it in the highest tier of payouts for FTSE 100 companies.

In 2022, it paid out 7%, and in two of the four years before it paid out over 8%. An additional return to shareholders in 2022 was through a £300m share buyback. This took the total capital return to shareholders to over £5bn since 2021.

Business focus already re-established

CEO Amanda Blanc looks to have been pivotal in enabling these big rewards to shareholders.

Since she took the top job in 2020, the company has sold off eight non-core businesses. These were in Singapore, Italy, France, Poland, and Turkey, and raised around £7.5bn.

Blanc has focused instead on increasing wealth fund flows in Aviva’s UK, Ireland, and Canada general insurance businesses.

In 2022, its life insurance new business increased 15% in value from 2021 and general insurance sales went up 8%. Operating profit rose 35%, despite difficult financial market conditions.

Pensions transfer market

Additionally, Aviva has targeted the lucrative pension transfer market as an area for growth. This involves a specialist such as the company taking over another firm’s defined benefit pension schemes.

On 5 May, it announced a £900m bulk annuity buy-in for the Thomas Cook Pension Plan. In February, it completed an £850m pension scheme deal for failed retailer Arcadia Group.

In 2022, it made 50 such bulk annuity deals worth £4bn. Overall, Aviva expects to finalise between £15bn and £20bn worth of these deals by 2024.

So well has Blanc done that even activist hedge fund manager Cevian lavished praise on her. When it took a 5% stake in Aviva in 2021, it said the firm had been “poorly managed” for years. But following the 2022 results, it said that Blanc had done an “excellent job in restructuring the company”.

The key risk for me in the share price is that inflation remains high in the UK and its other core markets. Higher inflation means it will pay out more in insurance claims.

That said, I think inflation is at or near its peak in its core markets. I also think its pensions business will offset some, or all, of any slide in its insurance business.

I already hold positions in Aviva. If I did not, then I would buy the shares now for their dividends and expect them to regain all this year’s losses at minimum.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Simon Watkins has positions in Aviva Plc. The Motley Fool UK has no position in any of the shares mentioned. 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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