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3 Things That Say Aviva plc Is A Buy

AvivaShares in insurer Aviva (LSE: AV) (NYSE: AV.US) have soared by a third over the past 12 months to 495p, while the FTSE 100 has struggled to break even.

But with dividends recovering and set to yield 3.4% this year, and the shares on a forward P/E of under 11, I reckon there’s still more to come. Here are three reasons why:

1. Dividends

A 3.4% dividend yield is not a market-beating one by a long way. In fact, it’s only a little ahead of the FTSE’s average of around 3% — and there are reliable dividends of 5% or more out there for income-seekers.

But Aviva’s dividend strength lies in its past and its future, and the fact that in 2012 it was rebased from an overstretched level. Today the dividend is very well covered by earnings — about 2.8 times, in fact. And with the insurance business looking like it’s heading into a nice recovery, the potential for future appreciation is high.

2. Cash

In the years leading up to 2012, cash was a problem for Aviva in that there just wasn’t enough of the stuff. Earnings were falling and cash remittance was not where it needed to be. There was nothing left for the hard times — these were the hard times.

But by the end of 2013, cash remittances were up 40% on the previous year to £1,269m, with a remittance ratio of 72% way ahead of the 49% recorded a year previously. And with some debt coming down, Aviva reported liquidity at the end of February of £1.6bn. Chief executive Mark Wilson stressed the company’s focus on “cash flow plus growth“.

3. Forecasts

This all leads to promising forecasts for this year and next. Earnings per share (EPS) is expected to more than double in the year to December 2014 (albeit from a depressed level), which would put the shares on a forward P/E of 10.6. And a further 11% growth predicted for 2015 would drop that P/E to just 9.5 with a dividend yield of 3.9% expected.

And the City’s analysts are mostly yelling “Buy“!

We have first-half results coming on Thursday 7 August, and I’m expecting to hear of steady progress.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool has no position in any of the shares mentioned.