If we look back far enough, we see the Aviva (LSE: AV.) share price up above £16. But those were different times, and Aviva was a different company.
As recently as 2018, though, the shares were up around 700p.
Onwards and upwards?
Aviva had already been on an efficiency drive before the 2020 stock market crash. It disposed of a lot of non-core assets, and looks like a leaner and fitter outfit.
What might it take for the Aviva share price to get back to those 700p levels?
In one way, it might actually not take much at all.
The outlook for 2023 looks tight. And though earnings per share should be positive, broker forecasts show a price-to-earnings (P/E) ratio of 13.
Earnings growth
That’s below the long-term FTSE 100 average, but not by much.
Forecasts, though, suggest strong earnings growth in the next two years. That would drop the P/E down to 8.3 by 2025, if the share price doesn’t move.
If Aviva shares climb to 700p by then, it would put the P/E around 15.
Do I think Aviva shares will climb that high that soon? No, for a few reasons.
Forever risky?
In the past, I think investors have largely seen banks, insurers, and other financial sector stocks as low risk.
Insurers can be cyclical. But I’ve always seen financials as long-term cash cows.
But after the big banking crash, Brexit, Covid, and now worldwide inflation and high interest rates? Their safety moats don’t look so wide or so deep.
The cyclical nature of insurers alone, I’d say, suggest their P/E valuations should be lower than average.
Price v earnings
Still, let’s suppose Aviva’s earnings hit their forecasts in the next two years. And then grow at just 5% per year for the following eight years.
We could end up with a P/E of just 5.7 at today’s share price. And a rise to 700p would only take it to 10.
Is that a fair long-term valuation? If it is, the Aviva share price could indeed more than double in a decade.
And if earnings grow by more than 5% per year from 2025 onwards… well, I don’t want to speculate too much.
Future growth?
I wouldn’t buy a stock if I didn’t think I stood a good chance of doubling my money in 10 years, from total returns.
In the past 20 years, we’ve seen an average annual FTSE 100 return of 6.9%. The same over the next 10 could compound up to a 95% gain, almost doubling my money.
Right now, the forecast dividend yield from Aviva stands at 8%. If it stays like that, even if the share price doesn’t move, I could double my money a bit quicker.
Tough outlook
It’s hard to overstate the risks facing financial stocks right now. The horrible economy makes things more uncertain than I think I can ever remember. And we could still have a rocky few years.
So, I’m making no forecasts.
But as a long-term investor, I do think I stand a good chance of doubling my money in a decade with Aviva shares.
