Investor Faith In Aviva plc Is Finally Being Rewarded

Last time I checked out Aviva (LSE: AV) (NYSE: AV.US), back in June, it was beginning to test my patience. It was down 6% over three years, against a 79% leap for Prudential and 95% for Legal & General. I bought Aviva as a recovery play, but there was no recovery, and no play.

Happily, the one big lesson I have learned from investing is that once you put your faith in a stock, you must give it time to do its thing. I’m glad I did. Since June, Aviva’s share price has jumped nearly 30% to 477p. It is up 9% in the last month alone. The good news has been a long time coming, but investor faith is finally being rewarded. Is there more to come?

I have been watching new chief executive Mark Wilson’s attempts to turn Aviva around with admiration. He seemed to have the right strategy, of boosting cash flow, slashing internal debt, dumping non-core and underperforming assets, and clearing out a layer or two of middle management. He was rewarded with a 14% increase in new business value in the first nine months of the financial year, to £571 million.

Operating expenses fell 7% year-on-year. The company performed well in France, and its growth markets of Turkey, Poland and Asia. Yes, that shocking 44% dividend cut last March hurt at the time, but yielding close to 9%, it was getting ridiculous. Wilson was right to chop it down to size.

Astra weeks

Aviva is still being punished for its overexposure to troubled southern Europe, with the value of new business falling 41% in Spain and 63% in Italy during Q3. There’s not much Wilson can do about the macroeconomic meltdown in southern Europe. General insurance and health also disappointed.

Wilson has been travelling to the US and Canada in a bid to explain his strategy and broaden the company’s shareholder base. Now he plans to repeat the trick in Asia. He must cringe every time someone points out how well Prudential has done in emerging markets, but at least Aviva has muscled into Indonesia, one of the world’s fastest-growing life insurance markets, in a joint venture with Astra International. Too little too late, yes, but better than nothing. It helps that Astra is already established in the country, reducing risk.

After sticking with Aviva through the bad times, I’m certainly not quitting now. Earnings per share are forecast to grow 10% this calendar year and 8% next (this follows several years of fat double-digit declines, including a filthy 70% drop in 2011).

Aviva yields a healthy 4%, just above the FTSE 100 average of 3.5%. And it still isn’t expensive, trading on a forward price/earnings ratio of 10 for December 2014. Patient investors in Aviva are finally reaping their rewards, and I suspect there are more to come.

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> Harvey owns shares in Aviva and Prudential.