As with many firms in the UK financial sector, Aviva’s (LSE: AV) share price has long looked cheap to me.
After the Brexit vote in 2016 there appeared to be a broad-based devaluation of the sector’s shares. The argument ran that the City of London would lose its position as Europe’s number one financial centre. This would affect the long-term prospects of companies in the field, it was said.
However, London remains the top financial hub in Europe and several firms in the sector continue to show strong growth.
Strong results
The UK’s largest general insurer and a leading life and pensions provider, Aviva, is a prime example. Its H1 2024 numbers released on 14 August showed operating profit jumping 14% to £875m from £765m in H1 2023.
Insurance, Wealth & Retirement product sales rose 12% to £19.7bn, and General Insurance premiums increased 15% to £6.005bn.
It also boosted its Solvency II operating own funds generation (OFG) by 10% to £758m. This means its key Solvency II cover ratio stands at 205% compared to the 100% legal minimum for the industry.
The strong results enabled it to increase its interim dividend per share by 7% to 11.9p. It also said that it anticipates further regular and sustainable returns of capital in the future, following a £300m share buyback in H1. These tend to support share price gains.
Robust growth prospects
Looking ahead, it expects further expansion in its Health business in H2. For its Wealth operation, it forecasts strong growth to continue.
It also anticipates increasing demand for its bulk purchase annuity (BPA) offerings. An annuity is a guaranteed annual pension that has been created from an investor’s savings.
According to industry data, only around 15% of the UK’s £1.3trn of defined benefit liabilities have so far been converted to annuities.
Aviva aims to increase its BPA volumes to £15bn-£20bn by 2026, with £7bn-8bn to be written this year.
Overall, the firm projects £2bn in operating profit by 2026.
How undervalued are the shares?
A risk for Aviva is intense competition in the insurance sector. Another is customers cancelling policies if the cost of living spirals up again.
However, as of now the stock trades on the key price-to-earnings (P/E) measure of share valuation at just 12.6. This is bottom of its peer group, which has an average P/E of 25.8.
In price-to-book ratio (P/B) terms it trades at only 1.4 against a competitor average of 3.9.
So how much of a bargain is it in cash terms? A discounted cash flow analysis shows it to be 45% undervalued at its present £5 share price.
So, a fair value would be £9.09, although the shares may go lower or higher than that.
The icing on the cake
Aviva also has a dividend yield of 6.7%. Analysts forecast that this will rise to 7.8% in 2025 and to 8.3% in 2026. These compare to just 3.7% currently for the FTSE 100.
I already own the stock (bought at a lower price) and am happy with that position.
However, if I did not have it I would buy it now for the high yield, strong business growth prospects and very undervalued shares.
