Should I buy more after Aviva’s share price jumps on 2023 results?

Aviva’s share price spiked on good results, but more importantly for me is that its dividend increase made it a true high-yield stock again in my view.

| More on:

Image source: Aviva plc

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Before Aviva’s (LSE: AV) results last week I had been seriously considering selling the stock.

No man’s land

Following my 50th birthday a while back, I decided to sell all but a handful of my growth stocks. Instead, I bought shares in even more companies that paid high dividends, and the higher the better.

Why this strategy? At my age, I want to have a regular stream of high revenue coming from my investments. This means dividend stocks paying high yields.

Sure, yields change as dividend payouts and share prices move. But at least I’m being paid something, provided I choose the stocks well.

Growth stocks, on the other hand, frequently pay no dividend at all. My only return from these is if the shares rise in price, which is often a big if. The handful I retain are proven winners over the long term, so far at least.

My problem with Aviva before its 2023 results were announced on 7 March was that it was in a no man’s land for me.

It was yielding under 7%. That’s my minimum for a high-yield stock. Why? Because the ‘risk-free rate’ (10-year UK government bond yield) is just over 4% and stocks are much riskier.

And its share price hadn’t been notably higher – above £5 – since 25 June 2018 (closing price, £5.04).

Dividend increased by 8%

In its 2023 results, Aviva increased the dividend by 8% to 33.4p a share, from 31p in 2022. On the current share price of £4.67, this gives a yield of 7.15% — above my minimum threshold, for now.

It also announced a new £300m share buyback programme to begin immediately. Buybacks tend to benefit share prices.

Both initiatives are supported by a 9% rise in operating profits in 2023 to £1.47bn, from £1.35bn in 2022.

A risk in the stock is that inflation rises again in Aviva’s core markets of the UK, US, and Canada remains elevated.

This would prevent interest rates from falling as expected and keep the cost of living high. In these circumstances, existing clients may cancel policies and new customers may be deterred.

Another risk would be a genuine new financial crisis.

However, mitigating both these for me is its continued strong capital generation. In 2023, Solvency II operating capital generation rose 8% — to £1.46bn, from £1.35bn in 2022.

Its overall Solvency II ratio stands at 207%, against just 100% as the regulatory standard for insurance companies.

Undervalued against its peers

Even without any effects from the planned share buyback, Aviva looked cheap to me.

On the key price-to-earnings (P/E) stock valuation measurement, it currently trades at 12.4 – against a peer group average of 18.

discounted cash flow analysis shows it to be around 43% undervalued at £4.67. So a fair value would be around £8.19, although it may never reach that price, of course.

So, I’m not going to sell my Aviva shares. But I’m not going to buy more either, as the holding I have is at a lower price and I’m happy with that.

But if I did not have this holding, I would undoubtedly buy the stock. It has a good yield, undervalued shares (in my view), and its results point to a strong core business.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Simon Watkins has positions in Aviva Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

Investing freedom — but inside a pension

Strapped consumers might be cutting back on investing, but they’re still keeping up their pension contributions. The only problem? A…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

Forget gold! I’d rather buy these 3 FTSE high-yielders in a Stocks and Shares ISA

Gold looks like a risky investment to me as the price hits an all-time high. I'm ignoring the fuss to…

Read more »

Young female business analyst looking at a graph chart while working from home
Growth Shares

This 55p UK stock could rise more than 300%, according to a City broker

This UK stock has fallen from above 800p to below 60p. But analysts at Citi believe it’s capable of a…

Read more »

Businesswoman analyses profitability of working company with digital virtual screen
Investing Articles

I think this FTSE 250 trust has all the right ingredients to lock in long-term profits

Today I'm examining the prospects of a private equity investment trust on the FTSE 250 that caught my attention recently…

Read more »

Young black man looking at phone while on the London Overground
Investing Articles

2 under-the-radar UK shares investors should consider snapping up

Two UK shares have caught the eye of our writer. She explains why investors should be taking a closer look…

Read more »

Investing Articles

Are these 2 ultra-high-yielding income stocks a good buy for me?

These two income stocks often split the debate amongst investors. So what does our writer think of them as potential…

Read more »

Senior woman potting plant in garden at home
Investing Articles

5% yield! This dividend stock could be great for my retirement

Our writer explains why this dividend stock appeals to her as she’s investing to build wealth to enjoy in the…

Read more »

A young Asian woman holding up her index finger
Investing Articles

I’d aim for a second income of £1,000 a month with this super-reliable dividend stock

I think a great way to build a second income stream is by investing in dividend stocks via a Stocks…

Read more »