When I see a forecast dividend yield of 6.8% on the table, it makes me think the Aviva (LSE: AV.) share price just might be too low.
I guess I’m biased, because I bought some a few years ago before the insurance giant went through its recent upheavels. And I’m only just ahead on the price I paid.
But we’ve had a modestly bullish share price rise of 12% so far in 2024. And I can’t help feeling we could see a further boost in the second half.
Hidden recovery
Aviva, along with other insurance stocks, suffered from painfully weak sentiment over the past few years. I’m not surprised at all, the way inflation and high interest rates have hammered just about any stock related to finance and investing.
But I reckon the downturn has been hiding a remarkable turnaround at Aviva. Behind the scenes, in the way the company is run, at least, if not in the share price.
At FY results time, CEO Amanda Blanc said: “We have made significant progress in 2023. Sales are up, costs are down, and operating profit is 9% higher. Our position as the UK’s leading diversified insurer, with major businesses in Canada and Ireland, is clearly delivering.“
Oh, and the board raised the dividend by 8%.
On into 2024
A Q1 update in May pretty much brought us more of the same. General insurance premiums rose by 16%, while Aviva saw a 15% inflow in its wealth management business.
This time, the CEO spoke of “consistently strong performance,” and “real optimism about 2024.“
Aviva expects to reach an operating profit of £2bn by 2026, up 36% from 2023’s £1.47m. If everything should rise 36%, including earnings, and the price-to-earnings (P/E) ratio stays constant, the Aviva share price could reach 665p in that time.
Of course, it tends not to work like that, and I confess to a bit of wishful thinking here. So what might go wrong?
Cyclical risk
This is a very cyclical industry. And in a good year, I’d expect to see the P/E a fair bit below the FTSE 100 average. A forward value of 11 for the current year looks fully valued, at least. In fact, looking at the one year alone, I’d be a bit concerned that it might be too high.
The multiple of around nine that it would drop to on 2026 forecasts looks a lot better. But is there really enough safety margin in that valuation?
With the economy still wobbly, and the insurance business so up and down, I’m not sure. Policy volumes often don’t hold up when people are feeling the pinch.
Breaking £5?
Still, H1 results are due on 14 August. And if they’re good, we could see another share price boost.
Could the stock finally break back through 500p by the end of 2024? I think there has to be a good chance. But bear in mind that this is little more than an inspired guess. And do your own research.
