Aviva (LSE: AV) shares are changing hands around a price not seen since 25 January 2008.
However, price and value are not the same thing. Price is whatever the market will pay for a stock, while value reflects the fundamental worth of the underlying business.
The difference between these two things can be huge. And it is in that difference that big long-term profits can be made, in my experience. This comprises several years as a senior international bank trader and decades as a private investor.
To ascertain whether such a gap exists in Aviva shares, I re-examined the core business and ran the key numbers.
The business’s fundamentals
Aviva’s 14 August-released H1 2025 results saw operating profit soar 22% year on year to £1.068bn.
The insurance and investment giant’s General Insurance premiums jumped 7% to £6.290bn. Its Wealth division’s assets under management rose 6% to £209bn, extending its position as the number one UK player. And over the same period, its Health division’s premiums rose 14% to £1bn.
A risk here is any failure to fully integrate July acquisition Direct Line’s business into its own. This could prove costly and could damage Aviva’s reputation.
However, CEO Amanda Blanc said in the results that Direct Line’s “integration is well under way… and we are confident the deal will contribute significantly to Aviva’s future growth.” Aviva will provide more details on the impact of the deal on its business in November.
That said, analysts forecast that Aviva’s profits will increase by 17.3% a year to end-2027. And it is ultimately this that drives any firm’s share price and dividends higher over time.
So, is there any value left in the share price?
Surprising for many, perhaps, given its price rise, Aviva’s 0.8 price-to-sales ratio is still bottom of its peer group. This comprises Legal & General at 1.2, Swiss Life and Admiral each at 2.1, and Prudential at 2.8, giving an average of 2.
So, Aviva is very undervalued on this basis.
A discounted cash flow valuation shows the stock is 43% undervalued at its current price of £6.69.
Therefore, the fair value is technically £11.74.
This valuation model highlights where any company’s share price should be, derived from cash flow projections for the underlying business.
My experience is that asset prices tend to converge to their fair value over time, although there is no guarantee that they will do this.
The bonus of a high dividend income
In 2024, Aviva paid 35.7p, producing a current yield of 5.3%. However, analysts forecast this will rise to 39.3p this year, 41.1p next year, and 44.3p in 2027.
These would generate respective dividend yields of 5.9%, 6.1%, and 6.6%. By contrast, the average FTSE 100 dividend yield is 3.5%.
So, investors considering a £10,00 holding in Aviva could make £6,970 in dividends after 10 years. And after 30 years, this could rise to £38,866.
The calculations are based on just the current 5.3% dividend yield and the dividends being reinvested back into the stock (dividend compounding).
For its potential share price gains and high yield returns, I will be adding to my stake in Aviva very soon.
