Are Aviva (LSE:AV.) shares starting to run out of steam? Since the start of 2024, the insurance giant has seen its market-cap surge by over 50%, with shareholders’ earnings closer to 70% after dividends. But in the last six months, this momentum’s begun to slow, with the Aviva share price hovering around the 650p mark.
So is this the end of the growth streak? Or is this just a temporary pause in the firm’s long-term upward trajectory?
Here’s what the experts are saying.
Latest Aviva forecasts
Over the last two years, the insurance sector as a whole has been on an impressive run, supported by higher interest rates. And like many of its peers, Aviva used the ideal macroeconomic landscape to propel its financials, delivering record bulk purchase annuity sales to employer pension schemes.
However, what makes it stand out among its rivals is the firm’s £3.7bn acquisition of Direct Line. This deal sits at the heart of management’s plan to become a more capital-light enterprise, rapidly expanding its roster of clients while simultaneously entering into new parts of the insurance market. And it’s why some analysts remain pretty optimistic for Aviva shares, even after such a strong bull run.
The team at Peel Hunt, for example, has just reiterated its Buy recommendation with a share price target of 755p.
Compared to where the stock’s currently trading, that’s a potential 16.2% capital gain over the next 12 months. Throw in the added bonus of a 5.8% dividend yield, and a £5,000 investment today could be worth roughly £6,098 by this time next year.
What to watch
The prospect of earning a 22% return from an established and mature FTSE 100 business is obviously exciting. After all, these large companies have historically only generated gains of around 8% a year over the long run. However, it’s important to recognise that Peel Hunt’s forecast is based on a few key assumptions.
The first is that the Direct Line acquisition meets all performance expectations. Some £225m in annual savings are expected to emerge from this deal alongside another £500m in capital synergies.
The second is that the company remains on track to hit its medium-term target of 20%+ return on equity by 2028, driven by its new capital-light business model.
It goes without saying that neither of these targets is guaranteed to happen. Even if management executes perfectly, external forces may still come along to disrupt progress. Customer credit quality is on a slow-but-steady downward trajectory due to wider economic headwinds.
Meanwhile, interest rates are also steadily falling, making its lucrative annuities business less attractive – a trend that’s only being accelerated by fierce competition in this space.
The bottom line
The tougher macro environment could explain why Aviva shares have lost their momentum lately, with investors locking in profits after such a stellar run.
But at a forward price-to-earnings ratio of 11.3, the group’s valuation remains relatively undemanding. And if Peel Hunt’s hunch is correct, now might indeed be a buying opportunity to consider for investors seeking exposure to a diversified insurance business.
In my mind, that definitely merits taking a closer look. But it’s not the only opportunity within the financials space I’ve got my eye on.
