8% dividend yield! Is the Aviva share price the FTSE 100’s best bargain?

The Aviva share price remains low, and the latest acquisition news hasn’t moved it. But just look at the size of that dividend!

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I keep thinking the refocus at Aviva (LSE: AV.) should have given the share price a boost by now. But it hasn’t happened so far.

The insurance firm just announced a new acquisition on 25 September, and that did little to move the shares. They wobbled around, pretty much unchanged.

The acquisition of AIG’s UK protection business, from a subsidiary of American International Group, isn’t a huge one, mind, valued at £460m. But the firm says it’s part of its new strategy.

Capital-light growth

Chief executive Amanda Blanc said: “This acquisition brings significant strategic and financial benefits to Aviva. It strengthens our prospects in the highly attractive UK protection market and continues our progress in repositioning the Group towards capital-light growth.

I think Aviva’s strategic change is very much the right one. Its problems of the past decade stemmed from an overweight exposure to sluggish, capital-intensive, businesses.

Weak share price

The shares are down 25% in the past 12 months, and 39% in five years. How much is down to the company itself, and how much is fallout from the current inflation crisis?

As an Aviva shareholder, I like to think it’s mostly the latter. But on the other hand, the firm’s new, slimmer business model has yet to be properly tested.

Still, the shares being so low means one key thing to me, and that’s fat dividends.

Dividend yield

Forecasts put the dividend yield at 8% right now. And for me, that makes it a cracking buying opportunity.

For my next buy, I might well go for an Aviva top-up. But if I buy more insurance shares, the forecast 8.5% yield at Legal & General might be too hard to resist.

Anyway, back at Aviva, what do forecasts look like?

Bullish outlook

Well, there’s one bit of cloud over the expected 2023 dividend. It would only be barely covered by earnings, and that’s far from ideal in a time when finances are generally tight.

Analysts think the yield should rise to 9.5% by 2025, and I think that would be a great result. Earnings should rise more strongly, to cover it 1.3 times. And I’d be happy with that for an insurance stock.

But it does show that there might not be much safety margin in the next few years should the sector suffer a downturn.

New buy

This new acquisition looks fairly low-risk to me. The company expects it to deliver “strong financial returns with an expected low-teens IRR (including integration and restructuring costs).”

And I can’t help feeling it’s exactly the kind of new business that Aviva should be going for.

So yes, there are risks in the financial sector right now. And a big dividend yield is far from guaranteed.

Healthy cash

But I reckon Aviva’s cash situation should get it through just fine. It’s had enough cash for a share buyback programme this year, for one thing.

It’s a long-term buy-and -hold for me. But I do think the shares could remain low for a while yet, or even dip further.

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.

Alan Oscroft 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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