I reckon the FTSE 100’s largest insurance company, Aviva (LSE:AV), could be cracking value at current prices. While fears around the health of the UK economy have depressed the share price, I think this is overdone.
An 8.3% yield is on offer for income investors.
That’s more than twice the FTSE 100 average of 3.6%. So is now the time to consider loading up on the shares?
Income and growth
Aviva swung from a £1.9bn profit in 2021 to a £1.1bn loss in 2022. That’s been the source of much muttering in the ranks.
But City analysts are projecting a return to £1bn profit in the full-year 2023 results. And a whopping 59.7% growth in earnings per share next year. Aviva has told the market that it will continue raising dividends per share from today’s 31.8p to 34.6p by 2024.
I don’t think the share price has moved up enough to capture the reality of such a turnaround.
Aviva represents a value play, there’s little doubt of that. The shares have rebounded from a three-year low of £3.75, set in September. But I see potential for further rises here.
Aviva isn’t only the UK’s largest insurer. It’s also Britain’s largest life insurer, with a more than 20% market share.
It’s now priced at just over £4 a share. This gives the company a price to earnings ratio of 9.6. That’s well under the FTSE 100 average of 13. It’s also too cheap for a fundamentally sound business like this one, in my opinion.
The company reported in its latest quarterly results that its cash and capital position is “robust”. It also noted that it increased the interim dividend by 8%.
One risk to the Aviva share price comes from a macroeconomic perspective. In a slower economy, fewer businesses tend to prioritise insurance. That makes for a potentially shrinking pool of new customers.
Strong at the top
I always look at leadership first when evaluating any potential additions to my portfolio. By any measure, CEO Amanda Blanc has done an admirable job.
Since taking over from Maurice Tulloch in July 2020, the Aviva chief executive has dramatically streamlined the business. It now operates in eight fewer international markets than when she arrived.
At the same time, Blanc has moved to get ahead of Aviva’s rivals. Buying up competing firm AIG Life UK for £460m in September 2023 was a good way to do that. As the legendary CEO Jack Welch famously said, the way to get ahead is to “buy or bury the competition”.
In October 2023, Aviva shares jumped on reports that the business was attracting takeover interest. The Times said several multinationals were interested. These include Germany’s largest insurer Allianz and the £72bn Danish firm Tryg. While a buyout figure of £6 a share (50% above the current share price) was mooted, I’d normally not buy into a company just on takeover rumours alone. I could be waiting a very long time to see that buyout go through.
Still, of its FTSE 100 rivals, only Legal and General has a higher payout ratio. Aviva’s 8.3% yield is more than four times higher than rival Prudential.
With all that in mind, I think Aviva could be a brilliant bargain based on its profit outlook.