Failing to buy Aviva (LSE: AV) shares last year was a Sliding Doors moment for me. Choosing the FTSE 100 asset manager and insurer over rival Legal & General Group would have sent my portfolio on a very different trajectory.
Over the last 12 months, Aviva’s share price is up 7.42%, while Legal & General’s is down 9.88%. At one point, the performance gap was even wider. However, the pre-Christmas FTSE dip – let’s call it the Santa Slump – has knocked almost 5% off Aviva’s share price. Have I just been handed a second chance to buy it?
While I’m disappointed in Legal & General’s performance, I have no plans to sell. Shares go through cycles, just like markets, and I’m optimistic it’ll swing back into favour when interest rates fall and UK sentiment picks up. So should I balance my Legal & General exposure by adding a splash of Aviva?
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Will this FTSE 100 stock come good in 2025?
With the new year approaching and the Stocks and Shares ISA deadline looming, now feels like a good time to address that question. Aviva’s dividend’s the main attraction. It’s expected to yield 7.65% in full-year 2024, rising to 8.2% in 2025. That’s far better than the yield from cash or bonds although, as ever with shares, my capital is at risk.
One concern is Aviva’s dividend is covered just 1.2 times by earnings, which is pretty thin. However, CEO Amanda Blanc’s strategy is aiming for “mid-single-digit growth” and “further regular and sustainable returns of capital” (presumably via share buybacks). So that’s encouraging. Aviva’s healthy balance sheet, strong cash flow generation and disciplined cost management should help.
However, Aviva faces one significant risk that Legal & General avoids. It must integrate its £3.6bn takeover of Direct Line. Broker Jefferies calls this deal “compelling” due to potential cost savings and reduced competition but warns of “material execution risk”.
For example, will Aviva adopt Direct Line’s upgraded IT systems or stick with its own older ones? It needs to get that right. Not every takeover delivers value.
I have enough exposure to this sector
Given that Aviva’s shares dipped recently while Legal & General’s held steady, Jefferies may not be the only one concerned. Yet with a price-to-earnings ratio of 12.28, Aviva doesn’t look expensive. Especially given its track record of steady growth in premiums and profitability.
Yet the FTSE 100 financial sector’s been turbulent since the pandemic. This is a mature market and growth opportunities are limited, although bulk annuities are promising. Personal annuity sales may fall though, when interest rates drop.
I still think the recent dip offers a great opportunity to buy Aviva. And yes, I do see them as a no-brainer buy except for one thing.
After reviewing my portfolio, I believe I already have enough exposure to FTSE 100 financials. With holdings in fellow high yielders M&G and Phoenix Group Holdings, I’m in danger of over-egging things by adding Aviva.
I’m curious to see if my underperforming trio can make up lost ground on Aviva in 2025. So for now, I’ll hold off on making any changes.
