The Aviva (LSE: AV) share price had fallen 8% from its 9 March high this year.
Like many financial stocks, this weakness followed the collapse of Silicon Valley Bank and Credit Suisse.
These failures fanned fears of a new global financial crisis. This never came, but Aviva’s shares are still marked down.
I have holdings in this top FTSE 100 insurance company and several other financial sector firms. Some of these I bought after the crisis in March, as it seemed to me that these fears were overdone.
They overlooked directives led by the Bank of England to tighten up liquidity and capital requirements in the sector.
A genuine new financial crisis does remain a risk for the sector, and for Aviva, of course. Additionally, the ongoing cost-of-living crisis may act as a deterrent to new client business.
However, the shares are still trading well below where I think they should be and also pay high dividends. The business looks set for major growth over the next three years as well.
Poised for growth
Analysts’ expectations are that from now to the end of 2026, Aviva will grow substantially.
The projections are for earnings to increase by around 43% and revenue by about 25% during that period. Return on equity by the end of 2026 is forecast to be at least 13%.
These gains are expected to come from the strategy in place since Amanda Blanc took over as CEO in 2020.
This is basically to sell off non-core businesses and re-energise core ones.
Eight businesses have been sold since then, raising around £7.5bn. At the same time its insurance, wealth and retirement businesses have grown in the UK, Ireland, and Canada.
In its H1 results, the company said it expects operating profit to increase by 5%-7% this year.
Undervalued compared to its peers
Aviva’s price-to-book (P/B) ratio is 1.3, against Phoenix Group’s 1.6, Prudential’s 1.7, Legal & General’s 2.8, and Admiral’s 8.6. Its peer group average is 3.7.
To try to work out what a fairer share valuation might be, I applied the discounted cash flow (DCF) model. And given the range of assumptions involved in this, I used several analysts’ valuations and my own.
The core assessments for Aviva are currently between 41% and 46% undervalued. The lowest of these would give a fair value per share of £7.27, against the current £4.29.
This does not mean the shares will reach that price, of course. However, it does underline to me again that they appear to be very good value.
Big dividend payer
In 2022, Aviva paid out 31p per share in dividends, giving a 7.2% yield based on the current £4.29 share price.
However, this year’s interim dividend of 11.1p was a 7.8% increase from last year’s 10.3p. If that was applied to this year’s final payment, then the total payout would be 33.418p. This would give a yield of 7.8%, based on the current share price.
Both compare very favourably to the current average FTSE 100 yield of 3.8%.
Yes, I think it is potentially too cheap to ignore. Given its dividends, undervaluation and growth prospects, I would buy now if I did not already own it. But I do not want to add to these holdings, as they would unbalance my portfolio.
