How Aviva plc Could Soar 87% In 4 Years

avivaThe shares of FTSE 100 insurer Aviva (LSE: AV) (NYSE: AV.US), currently trading at about 530p, have risen 55% over the last four years, more than double the 26% gain of the index.

However, Aviva could deliver an even bigger rise over the next four years, because the shares have the potential to soar 87%.

Here’s how

Aviva was hit hard by the financial crisis of 2008/9, and has taken longer to recover than some of its peers. More than one dividend cut and multiple boardroom departures tell the story of a difficult turnaround.

However, under the latest chief executive, Mark Wilson, who took over at the start of last year, recovery is gaining traction. Wilson arrived fresh from having turned around Hong Kong-based insurer AIA Group and seems to be repeating the trick at Aviva. Just about all of the four-year rise in Aviva’s shares has come on his watch.

Wilson gave his first-year report card when Aviva released its annual results in March:

“The turnaround at Aviva is intensifying … Although we have made progress in 2013, I want to guard against complacency. Aviva still has issues to address. Have we made progress? Yes, some. Is it a little faster than anticipated? Probably. Have we unlocked the full potential at Aviva? Not yet”.

City analysts are certainly optimistic that Aviva can make further great strides forward. The analysts are forecasting that earnings per share (EPS) will increase at a compound annual growth rate of nearly 30% over the next four years, helped by a more-than-doubling of last year’s 22p to 47p this year, and then on to 62p by the year ending December 2017 — a total increase of 182%.

Of course, if the shares were to track earnings, and continued to rate on their current trailing price-to-earnings (P/E) ratio — which stands at 24.1 — the price would rise by the same 182%. However, because Aviva’s earnings are in major recovery mode, the trailing P/E isn’t too helpful: the current-year forecast P/E is less than half that of the historic.

Given Aviva’s forecast progress, I don’t think it would be unreasonable for the shares — four years from now — to rate in line with the FTSE 100’s long-term average historic P/E of 16. We’d then see the price at 992p — an 87% rise from today’s 530p.

Investors would also bag four years of dividends. Analysts see dividend progression from last year’s 15p to around 25p for 2017 — an income rise of 67%. Forecasts suggest a total of 82p a share paid out over the period. Put another way, a £1,000 investment in Aviva today would deliver £155 in dividends.

Of course, none of this is guaranteed. However, history tells us that companies are capable of delivering the kind of return I've outlined here -- or even higher.

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G A Chester does not own any shares mentioned in this article.