Aviva Plc’s 2 Greatest Strengths

avivaWhen I think of life and general insurance company Aviva (LSE: AV) (NYSE: AV.US) , two factors jump out at me as the firm’s greatest strengths and top the list of what makes the company  attractive as an investment proposition.

1. Turnaround potential

In an update yesterday, May 15, Aviva reported that the value of new business (VNB) was up 13% in the firm’s first quarter of the year. That’s the sixth quarter of year-on-year growth and seems to confirm that the firm’s turnaround remains on course.

Aviva’s turnaround plans focus on debt-reduction and what the directors describe as ‘”cash flow plus growth”.

Year to December 2009 2010 2011 2012 2013
Revenue (£m) 34,690 31,805 26,255 22,744 22,035
Net cash from operations (£m) 2,685 1,807 (342) 2,294 3,997
Adjusted earnings per share 45.1p 37.6p 11.1p (11.2p) 22p
Dividend per share 24p 25.5p 26p 19p 15p

The scoreboard shows good progress on both cash flow and earnings, which is growth in my book, but investors won’t ignore the dividend, which has travelled in the wrong direction.

The firm’s CEO reckons the company’s turnaround is ‘intensifying’ and starting to show in the trading results. The shares have responded well during 2014, up around 17% so far, but, despite progress, Aviva reckons its turnaround remains youthful and, if macro-economic conditions remain benign, there’s still gas left in the tank.

2. Shrinking debt

Cash flow is up, but debt is down, too, adding further momentum to Aviva’s turnaround. £240m was knocked off the external borrowings tally during April alone. The debt record looks like this:

Year to December 2009 2010 2011 2012 2013
External borrowings (£m) 15,000 14,949 8,450 8,179 7,819

There’s a clear downward trend — but there needs to be. Aviva operates in a cyclical industry and forward profits and cash flow will likely rise and fall with fortunes of the wider economy. If Aviva doesn’t pay down debt now, in the good times, it never will.

External borrowings are running at about four times the level of operating profits, signalling that the firm needs to go much further on debt if it is to be in good shape when the next downturn comes.

What now?

At its current share price of 507p Aviva’s forward dividend yield comes in at about 3.6% for 2015 and the forward P/E rating is around 10. City analysts reckon earnings will likely grow at 10% that year, so the valuation looks quite good. However, bear in mind the firm’s cyclicality, which demands an ever-more-modest rating as the economic cycle matures.

Aviva's turnaround is progressing well, but I'm mindful of the firm's cyclicality, which keeps me looking for other opportunities such as a share idea for capital gains from one of the Motley Fool's top small-cap investors. His diligent research has uncovered what looks like one of the best growth shares for 2014.

A strong recovery in profits followed restructuring and the directors predict double-digit margins driving a profits surge in the years to come.

For a limited period, this investor wealth report is downloadable free. To get your copy, click here.

Kevin does not own shares in Aviva.