Aviva (LSE:AV) shares are down 9.45% over 12 months. The stock drove as high as £4.67 before falling to lows around £3.66 and recently recovering to around £4.
So had I invested £1,000 in Aviva stock a year ago, today I’d have £906, plus dividends. Thankfully, Aviva is something of a dividend giant. Over the year, I would have received around £65 in dividends.
Robust performance
The underperformance of Aviva shares over the past year shouldn’t be anything for investors to worry about. The company’s performance has remained strong with operating profit up 8% in the first six months of the year.
This was matched by an impressive 26% increase in Solvency II own funds generation. Although the Solvency II shareholder ratio — a key metric for the financial health of insurers — fell 10 basis points to 202%.
Instead, broad patterns in the share price suggest Aviva has been a victim of changes in wider investor sentiment, rather than concern about the firm’s performance.
For example, Aviva shares tanked during the Silicon Valley Bank fiasco in March, but never recovered. It’s also true that with interest rates extending so high, investors have reallocated capital from shares to cash.
Interestingly, despite this broad movement away from equities, Aviva’s assets under management (AUM) actually increased over 12 months. The insurer had £156bn AUM as of 30 June, up from £138bn a year ago.
Oversold
It becomes clear, I feel, from several metrics that Aviva is oversold and undervalued. Of course, as noted above, part of the reason is that investors have moved away from stocks and put their money into debt and cash.
As such, it’s easy to note that Aviva is trading with a price-to-earnings ratio that sits below long-term averages. However, this only partially reflects the fact that interest rates haven’t been this high for decades.
Nonetheless, Aviva looks cheap, trading at around 7.8 times forward earnings and with a dividend yield of 7.8%. Analysts have forecast earnings per share (EPS) of 52.5p in 2023, projected to rise to 61.1p in 2024 and to 67.3p in 2025.
These projections suggest that Aviva shares have the potential for significant medium-term growth, offering an opportunity for investors who are open to exploring the stock’s strong fundamentals and prospects for expansion.
Considerations
While analysts are broadly positive on Aviva, it’s worth remembering that inflation presents a challenge for insurers. Aviva and its peers need to stay ahead of price increases to ensure their margins are protected. This pressure won’t relent until inflation falls.
However, there are plenty of tailwinds too, including positive trends in bulk purchase annuity. This years we’ve seen the insurer complete bulk purchase annuity schemes with Deutsche Bank and Thomas Cook.
In a bulk purchase annuity, a pension scheme or plan purchases a policy from an insurer to cover the pension obligations and liabilities associated with a group of its members or retirees.
