7.1% yield! Would I be silly not to buy cheap Aviva shares?

This Fool likes the look of Aviva shares for their handsome dividend yield and valuation. So, would now be a smart time to buy?

| More on:
Smart young brown businesswoman working from home on a laptop

Image source: Getty Images

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.

After a slow start to the year, shares in insurance giant Aviva (LSE: AV.) have been picking up pace. They’re up 9.1% year to date and 19.1% over the last 12 months.

That beats the performance of the FTSE 100. If I’d picked up shares in Aviva a year ago, I’d be a happy investor today.

Unfortunately, I didn’t. But with its share price now at £4.73, I’m tempted. That looks cheap. Would I be silly not to buy the stock? And should investors consider it too?

Standout features

From my research, a few things stand out to me. The first is its meaty dividend yield. At 7.1%, that’s way above the Footsie average (3.6%). Last year its dividend grew by 8%. That’s the third year in a row it has risen. To go with that, management also announced a new £300m share buyback programme while upgrading its dividend guidance moving forward.

Dividends are never guaranteed. So, when I see yields of 7%+, I’m naturally sceptical. That said, I feel Aviva will be paying out in future given its approach to rewarding shareholders over the last few years.

Then there’s its valuation. Today, it has a price-to-earnings ratio of 12.5. Okay, there are cheaper stocks out there. But I think that looks like good value for Aviva. It’s a high-quality business, so even though that’s slightly above the Footsie average, it still looks like a good deal. Its long-term historical average is around 14, further signalling there’s value in today’s price.

What next?

But what’s in store next for the business? 2023 saw it continue to gain momentum. Operating profit rose 9% to just shy of £1.5bn, boosted by a strong performance across a host business areas, such as wealth and insurance premiums. It further delivered its £750m cost reduction target a year ahead of schedule.

But how does it take the next step and kick on from here? Luckily, it seems that continuing to streamline the business and make it a more lean and efficient operation is the top priority for CEO Amanda Blanc.

In the past, Aviva has often been viewed as a business that was too diversified. It focused on too many areas in too many regions. And this harmed performance. Under Blanc, this has changed.

In its latest results, it announced that it had completed the exit from its Singapore joint venture for £937m, further reducing its geographic footprint.

These moves build on the already strong competitive advantage that Aviva has. That includes its stellar brand recognition and customer base of nearly 20m.

The risks

While that’s all well and good, streamlining comes with risks. For example, it leaves the business reliant on just a couple of markets. If they falter, Aviva will feel the impact more strongly than if it was more diversified.

The insurance industry can also be cyclical as well as extremely competitive. Insurtechs have been gaining popularity in recent years. That’s a developing threat to Aviva.

Time to buy?

Even so, I’d buy the shares today if I had the cash. At £4.73 a pop, I think they’re a shrewd investment proposition and offer long-term growth potential.

Its meaty yield is without a doubt one of the major draws. That would provide a solid passive income stream for my portfolio.

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.

Charlie Keough has no position in any of the shares mentioned. 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

Investing Articles

Is this one of the FTSE 100’s best-value growth shares?

Looking for great-value recovery shares to buy today? Based on City forecasts, this could be one of the best that…

Read more »

Investing Articles

Will the Tesco share price hit a 10-year high in 2024?

Up from 200p less than two years ago, the Tesco share price has enjoyed impressive growth lately. Now I'm considering…

Read more »

Electric cars charging in station
Investing Articles

Where will Tesla stock be in 5 years? Here’s what the experts say

The analysts' outlook for Tesla stock in the next few years seems to be all over the place, as the…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

Nearing its 12-year low, this FTSE growth stock could be the bargain of the year!

Harvey Jones has happy memories of owning this FTSE 100 growth stock. Now he's wondering whether to take a trip…

Read more »

Investing Articles

BT share price: a bargain or one to avoid?

This Fool has been keeping tabs on the BT share price. Despite looking cheap, he's steering clear of the stock…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

3 reasons why I predict UK shares will soar over the next 12 months!

Our writer believes there are plenty of reasons why UK shares will do well over the next year or so.…

Read more »

Investing Articles

Are these the best stocks to buy after the UK election?

With Labour now leading the UK, change is on the horizon. I'm considering the best stocks to buy based on…

Read more »

Investing Articles

1,000 shares in this FTSE 100 stalwart would give me £525 of dividends!

The FTSE 100 is packed full of stocks offering sizeable dividend yields, but I feel this one is the pick…

Read more »