The Aviva (LSE:AV.) share price has been on quite a roll over the last 12 months, climbing by almost 23%. Yet even after this rally, the insurance giant continues to pay an impressive 6.2% dividend yield for income investors.
With that in mind, it isn’t surprising Aviva’s among some of the most popular FTSE 100 stocks to buy right now, according to AJ Bell‘s latest trading data.
But is this all about to come crashing down?
What are the experts worried about?
The upward trajectory of Aviva shares has been largely driven by a genuine and sustained operational transformation at the hands of CEO Amanda Blanc. Having successfully capitalised on the tailwinds created by elevated interest rates, particularly in the annuities market, Aviva’s earnings and margins have all materially improved, triggering a re-rating for Aviva shares in the eyes of institutional analysts and investors.
But this is where things might be starting to get sticky. Following its share price rally, Aviva now trades at a forward price-to-earnings ratio of 12.99 – above its 10-year average of 9.09 by 43%.
Seeing a higher earnings multiple for a business that’s delivered a step change in its financial performance isn’t unusual.
But with the tailwinds of higher interest rates starting to slow, the company’s ability to maintain its current pace seems to lie squarely with the successful integration of Direct Line. And integrating a massive £3.7bn acquisition comes with substantial execution risk.
Aviva’s challenging task
The track record of businesses pulling off large-scale acquisitions is fairly bleak, with most failing to generate any value for shareholders once all the unexpected costs emerge.
To Aviva’s credit, its takeover of Direct Line has so far seemingly been relatively pain-free. Impressive synergies are already emerging, and early regulatory feedback appears to be relatively supportive. Yet the process is far from complete.
Prior to its acquisition, Direct Line built its reputation as a direct-to-consumer, no-broker insurer. A perceived shift away from this approach to doing business could alienate existing loyal customers.
At the same time, management has to shift all of Direct Line’s old claims, underwriting, and policy IT systems onto Aviva’s own infrastructure – a multi-year task that’s notorious for delays and cost overruns.
In other words, while the integration of Direct Line has so far proven relatively smooth, there’s still a risk that might change. And with it, investors may reassess their willingness to attach a premium to Aviva shares.
So is now the time to sell?
It’s important not to ignore the significant integration risk this business currently faces. But at the same time, it’s worth pointing out, under Blanc’s leadership, Aviva has been developing a habit of defying analyst expectations. And with a juicy dividend yield on offer, investors are being compensated for taking on a bit of risk.
It’s important not to ignore the significant integration risk this business currently faces. But at the same time, it’s worth pointing out that, under Blanc’s leadership, Aviva has been developing a habit of defying analyst expectations. And with a juicy dividend yield on offer, investors are being compensated for taking on a bit of risk.
With that in mind, for investors looking to gain exposure to UK insurance, drip feeding some capital into Aviva shares over time, could be a move worth considering.
