The Aviva (LSE: AV.) share price has not been kind to me since I bought back in 2015. Still, I’ve had some nice dividends to help keep me going.
The past six months have brought a share price upturn. But we’re still looking at a 20% drop in five years.
That low share price, or rather the valuation that goes with it, is one of the reasons I might buy more in 2024.
1: Undervaluation
Before I look at numbers, I must point out one thing. We should expect a stock valuation to be weak when a company is going through a tough patch.
Even before the pandemic, Aviva was struggling to reshape itself. It was too bloated and unfocused to compete against slimmer and more efficient competitors.
Then we had the 2020 stock market crash, and all that came in the years after. And much of the pain that insurance stocks have gone through must be justified.
Right now, there’s a price-to-earnings (P/E) ratio of 14, with FY results due on 7 March. That doesn’t seem good value, but it’s based on today’s tough earnings.
Earnings growth forecasts show the P/E coming down to 9.5 in two years. If they’re right, that could look cheap.
2: Cash generation
One reason I like the insurance sector in general is that it’s a great long-term cash generator.
Aviva is on a 7% dividend yield now, and forecasts have it rising above 8% by 2025. The dividend has been a bit erratic in the past few years, though many others have too.
But, this is a cyclical sector, and I do expect to see some weak years in the decades ahead. That means long-term valuations should be lower than the FTSE 100 average.
And hoping for a steady 7%-8% dividend every year would, I think, be a bit optimistic.
Still, in Aviva’s Q3 update, CEO Amanda Blanc said: “I am extremely confident that Aviva will continue to deliver more for shareholders, and we reiterate our guidance for a total dividend of c.33.4p for 2023, and further regular and sustainable returns of surplus capital.”
The firm also said it expects “to beat our own funds generation (£1.5bn p.a. by 2024) and cash remittances (>£5.4bn cumulative 2022-24) targets, and to deliver our target of £750m gross cost reduction by 2024 one year early“.
3: Outlook
We’ve already seen what City forecasts say, and they seem to be upbeat. We need to take care, though, as they do often get it wrong.
We’ve also see the firm’s own outlook. I know they’re always upbeat. But Aviva has put some numbers on it, so we have something to measure against.
Falling inflation and interest rate cuts should, I hope, boost the whole sector. There’s a risk we won’t see them for a while yet, though.
And I’m still not sure if the Aviva share price valuation might be high enough for now, with the volatility of its business. On balance, though, I might buy more to pocket some long-term dividend cash.
