Shares in FTSE 100 insurance giant Aviva (LSE: AV) are still down 8% from their 9 March 12-month high.
I bought them shortly after that on the basis that the big price drop looked completely unwarranted to me.
The fall resulted from fears of a new financial crisis around that time. And that followed the failures of Silicon Valley Bank and then Credit Suisse.
To me, these worries overlooked the massive strengthening of the UK’s financial sector after the 2007 Great Financial Crisis.
A genuine new financial crisis does remain a risk for the stock, of course. Additionally, the ongoing cost-of-living crisis may act as a deterrent to new client business.
Business on a major uptrend
Highlighting that these concerns may be overblown was Aviva’s H1 2023 results report. It showed a Solvency II shareholder surplus of £7.8bn, giving a coverage ratio of 202%. A ratio of 100% is the legal requirement for UK insurers.
Over the same period, operating profits increased by 8% to £715m (from £661m in H1 2022). The company now expects its operating profit for FY23 to rise by 5%-7%.
Gross written premiums from its General Insurance business rose 12% in H1 to £5.3bn (up from £4.6bn). And new business value from its Insurance, Wealth & Retirement segment increased 7% to £319m (from £297m).
Analyst estimates are for Aviva’s earnings and revenue to grow by 28.7% and 18.5% a year, respectively, to end-2026.
Earnings per share and return on equity are expected to rise by 28.9% and 13.7% a year to the same point.
Undervalued?
Despite recovering some of the ground lost after March’s mini-financial crisis, the company is still very undervalued against its peers.
On the key price-to-book (P/B) ratio, Aviva is currently trading at 1.3 against a peer group average of 3.7.
This group comprises Phoenix Group Holdings at 1.6, Prudential at 1.7, Legal & General at 2.9, and Admiral at 8.4.
A discounted cash flow analysis shows Aviva shares to be around 48% undervalued at their present price of £4.30.
Therefore, a fair value would be around £8.27, although this does not necessarily mean they will ever reach that level.
Big dividend payer
Aviva paid 31p per share in dividends in 2022, giving a 7.2% yield based on the current £4.30 share price.
This looks set to rise, as 2023’s first interim dividend of 11.1p was a 7.8% increase from last year’s 10.3p. If that was applied to the final payment, then the total payout would be 33.418p. This would yield 7.8%, based on the current share price.
Both compare very favourably to the current average FTSE 100 yield of 3.8%.
As I bought the stock much lower after the mini-crisis in March, I am happy with my position. Additionally for me, buying more of it would unbalance my overall portfolio.
If I did not already own it, I would absolutely buy it now for the long term. Its business looks in a firm and sustainable uptrend, it appears very undervalued, and it pays high dividends.
