When looking for quality income stocks, I look for a few key traits:
- Is the business an industry leader, and are its products or services essential or luxury?
- What does its performance track record, balance sheet, and investor rewards policy look like?
- What’s the future outlook for the business and its industry as a whole?
Taking these into account, I want to take a closer look at Aviva (LSE: AV.) shares.
My criteria
Let’s start by taking a look at Aviva’s share price performance. The shares have fallen slightly over a 12-month period due to macroeconomic volatility linked to rising interest rates and soaring inflation.
They’re down 5% from 458p at this time last year, to current levels of 432p.
- Aviva is most definitely one of the biggest firms in its space. With a long history, it has navigated the changing face of financial services and kept up to speed with the times. All the while, it has managed to grow organically as well as through acquisitions. It must be noted, the financial services industry is intensely competitive. In terms of its products, some are essential – such as car insurance, which is a legal requirement in the UK – and others aren’t, such as investment and personal insurance products.
- Aviva has a pretty solid track record of performance, which includes revenue and profit growth historically. I do understand that past performance is not a guarantee of the future. However, I’m much more inclined to invest in a business with a good track record of growth, rather than a firm with a mixed history. In addition to this, Aviva does have a good track record of investor returns. Its great, cash-rich balance sheet is one of the big reasons behind this. This helps firms like Aviva provide consistent returns. At present, a dividend yield of 7.3% looks well covered by 1.3 times earnings. In addition to this, it has undertaken some pretty juicy share buybacks in recent years.
- An ageing population should bode well for the future growth, performance, and return levels for Aviva – and the industry as a whole. As more people look towards securing their future, this will help sell insurance products and services. In addition to this, Aviva’s digitization strategy in recent years seems to be paying off. Shrewd acquisitions have also helped broaden its profile and geographic growth.
Risks and my verdict
Reviewing possible risks, I’ve touched upon competition already. This includes some other financial services heavyweights on the FTSE 100 including Legal & General and M&G, to name a couple. Vying for the same business can be tricky. Next, continued macroeconomic volatility could hurt demand and performance. Performance underpins investor returns. Finally, although acquisitions have served Aviva well, a poor one – which can be costly to dispose of – can hurt sentiment, its bottom line, and any returns too.
To conclude, I do think Aviva shares are a great passive income option and definitely one of the best on the UK’s premier index. When I next have some investable cash, I’d happily add some shares to my holdings.
