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3 Reasons Why I’m Still Buying Aviva plc

AvivaAviva (LSE: AV) (NYSE: AV.US) has been a fantastic turnaround investment over the last year, but the market seems to have cooled on the stock recently, and Aviva’s share price is down by around 8% from its June peak.

Today, the insurer announced its latest strategy update, along with new financial targets aimed at supporting its ‘cash flow and growth’ focus, which I’m a big fan of.

I’ll come to the financials in a moment, but what can we learn from the firm’s strategy update?

1. Remain a composite

Aviva has always been a composite insurer — in other words, it offers both life and general insurance products.

However, this hasn’t translated into customer brand loyalty, according to the firm, as customers have not seen any advantage in buying multiple products from one company. I know that’s true in my case — my wife and I don’t have more than one insurance policy with any single company.

Aviva reckons that it can change this: by utilising the strength of its brand, and selling more policies directly to customers, rather than through intermediaries.

In my opinion, this plan could generate strong sales growth, but it will be some years before we can gauge whether it has been successful.

2. Aviva.com

A core part of Aviva’s approach to developing customer brand loyalty will be a heavy focus on digital — both selling and marketing. The insurer aims to develop ‘digital across all distribution channels’, for both personal and business customers.

I believe this is a necessary step, which should help Aviva to cut costs and boost profit margins. Successful execution, however, will need investment and persistence.

3. Double cash flow?

Aviva unveiled two new financial targets today:

  1. Double net cash flow from business units £400m in 2013 to £800m by the end of 2016.
  2. Reduce the operating expense ratio from 54% in 2013 to less than 50% by the end of 2016.

Both of these targets have a clear implication for shareholders — success will mean that dividend growth can be sustainably funded.

Aviva’s shares currently offer a prospective yield of 3.4%, in-line with the FTSE 100 average. In my view, the shares remain a buy for income.

However, I suspect that capital gains will be limited in the near term, as Aviva’s yield is lower than many of its peers, and it is currently trading substantially above its book value. 

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> Roland owns shares in Aviva.