Aviva (LSE: AV.) shares are dead in the water. There’s no money to be made in insurance stocks any more. It’s just another FTSE 100 ‘dinosaur stock’ that’s going to return middling dividends from now until the last syllable of recorded time.
I don’t think it’s unfair to say the above was a somewhat common sentiment a few years ago. But anyone saying something along those lines would be eating their words today. That’s because what has happened since the Aviva share price hit a low of 228p in March 2020 has been rather remarkable…
Extraordinary
To begin with, the rise of the dividend has been extraordinary. The total payment has been increased every year since then, often by double-digit percentages. Last year’s payment of 39p is around a 6%-7% yield for anyone buying a year ago – but is a 17% effective yield for anyone who snaffled the shares at the 2020 low.
These kind of ballooning dividends are often accompanied by a surging share price, and that’s certainly the case here. The share price rose from 228p to 626p over the period. While the price has dipped since the Middle East conflict erupted, at its higher level earlier in the year, investors would have tripled their stake.
What explains such brilliant performance? And could Aviva shares achieve a similar result in another six years’ time?
Buy the dip
Well, the first thing to point out here is that 2020 was a 10-year low for the share price. The consequences of the COVID-19 pandemic were severe for the finance and insurance sector. And it affected Aviva more than most. It was simply a golden opportunity to ‘buy the dip‘. This is yet another reminder of how buying stocks at times of panic can often be extremely rewarding.
That’s not to take away from company performance over the period. The decision to streamline operations and focus more on the UK and Ireland portion of the business is working wonders, and it has been achieved under the stewardship of CEO Amanda Blanc. Good management and company culture are one of those ‘intangibles’ that can keep a business firing on all cylinders over the long run.
The near future promises much with the integration of Direct Line and impressive earnings targets – an 11% growth in earnings per share targeted until 2028 is rare to see from such an established FTSE 100 company. Although this does come with the downside of an elevated valuation. A price-to-earnings ratio of 24 could mean there’s some way to fall if things go sour.
Overall? I will say that a repeat performance of the last six years is unlikely – it was simply that good of a run. But with chunky dividends and ambitious targets for growth, I wouldn’t be surprised to see Avivia shares achieve better-than-average market returns. That’s why I’d say they’re worth considering for an investor today.
