I’d buy this underappreciated FTSE 100 stock right now

Aviva has underperformed the market quite significantly in 2023, but Muhammad Cheema discusses why he still likes this FTSE 100 stock.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Image source: Aviva plc

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The FTSE 100 has remained largely flat in the last year, returning less than 1%. However, this is still better than many individual shares.

For example, both Halma and Hargreaves Lansdown enjoyed solid growth this year. Yet their share prices have fallen by 18% and 24%, respectively.

While Aviva (LSE:AV) shares haven’t seen such a drastic fall, they’ve still declined by almost 8%.

I believe this provides me with an opportunity to consider adding some of its shares to my portfolio.

What are the risks?

Unfortunately, the financial services industry hasn’t had a great 2023.

This isn’t good for Aviva, as an insurance firm. In fact, for many firms in this area, their share prices have been struggling considerably since the major financial crisis in 2007.

HSBC, Lloyds, and Barclays are among the companies whose share prices are yet to recover from this period.

Aviva has been no exception, with its share price still down by about 63% from the start of 2007.

The US banking crisis back in March this year didn’t help things, with many financial services firms seeing their share prices falling considerably as a result.

Furthermore, the UK economy failed to grow at all in the third quarter of this year.

As the insurance industry is influenced by the wider economy, there’s a risk that Aviva won’t be able to generate meaningful growth for a while yet.

This means as the UK economy stagnates, so could Aviva shares.

I’m an investor who thinks about the long term though.

I don’t care if the economy isn’t doing so great in the short run. I know it will stabilise at some point. Once it does, financial services firms should thrive as the economy grows.

Moreover, I can see that Aviva has £19.8bn on its balance sheet.

This should be more than enough to weather any powerful economic storm that presents itself in the short term.

The dividend is just too good to ignore

With a dividend yield of 8.2%, Aviva shares offer an excellent opportunity to build a second income.

It’s important to remember that dividends aren’t guaranteed, but let’s see how many of its shares I’d need to buy to generate £100 a month.

Assuming the 31p per share in dividends that were paid out last year will be the same this year, I’d need to buy 3,871 of its shares to achieve this.

This is a conservative estimate too. The actual number of its shares I’d need to buy could be less.

As mentioned, I’ve assumed that the interim dividend this year is the same as last year. However, Aviva has already announced that it will be 8% higher this year than last year, increasing from 10.3p per share to 11.8p per share. If the final dividend increases by a similar amount, I wouldn’t need to buy this much stock to generate the same passive income.

I also like that this increase is sustainable as it’s in line with the rise in operating profit.

Moreover, Aviva has been able to improve its operating profit while the financial services sector is under high pressure. This is a good sign.

Therefore, if I had the spare cash, I’d buy its shares today.

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.

Muhammad Cheema has no position in any of the shares mentioned. 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.

More on Investing Articles

Midnight is celebrated along the River Thames in London with a spectacular and colourful firework display.
Investing Articles

Nvidia shares hit a new high after record earnings. Is there a lot more to come?

Nvidia stock smashes expectations, as quarterly profit soars 600%. It's time for a 10-for-one stock split too, as it reaches…

Read more »

Abstract 3d arrows with rocket
Investing Articles

Scottish Mortgage shares rise following FY update! Time to buy?

Scottish Mortgage (LON:SMT) shares were closing in on 900p today after a positive full-year report from the giant FTSE 100…

Read more »

British Isles on nautical map
Investing For Beginners

It’s time! Here’s my FTSE 100 hit list for the general election

Jon Smith outlines the potential reaction for the FTSE 100 from the upcoming general election and the main stocks he's…

Read more »

Investing Articles

National Grid reveals £7bn rights issue and the share price plunges – should I invest now?

The National Grid share price has dropped almost 10% and a dividend cut is looming, but it may be a…

Read more »

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

Nvidia stock is becoming more affordable!

Nvidia stock is up 2,500% over five years, but the chip giant’s share split -- announced during its earnings report…

Read more »

Investing Articles

Are Rolls-Royce shares good for passive income?

Our writer is getting mixed messages about the Rolls-Royce dividend. But whatever happens, he thinks passive income hunters will be…

Read more »

Investing Articles

Could the Rolls-Royce share price end 2024 above £5?

As the Rolls-Royce share price continues its remarkable run, our writer considers where it might be at the end of…

Read more »

Investing Articles

UK stocks are hitting all-time highs! Yet these 2 still look cheap to me

The FTSE 100's on a roll. But it's still possible to pick bargain UK stocks, provided we know where to…

Read more »