Is Aviva plc A Promising Capital-Growth Investment?

avivaLast month’s half-year results announcement seems encouraging at Aviva (LSE: AV) (NYSE: AV.US), the life and general insurance company.

Operating profit is up 4% over the year-ago figure. On top of that, the firm’s chief executive reckons all the key metrics improved and that shows momentum in Aviva’s turnaround continues.

Progress looks good, but I’m cautious about jumping into Aviva for capital growth.

But the shares are doing well!

If I’d invested in Aviva in the spring of 2013, when the shares were about 300p, I’d be feeling chipper now that the shares trade at 524p. However, if I had invested then, would I have the gumption to sell now to lock-in my gains? Maybe not, but maybe I should.

But why sell now when earnings look set to double during the current trading year to around 47p per share? Aviva is on a roll. Earnings are rising fast. This firm is growing nicely.

Perhaps, but Aviva’s been here before. The firm scored this level of earnings back in 2009. Between then and now, earnings collapsed to an earnings-per-share loss of 11.2p during 2012.  And that’s my nagging worry about Aviva — the firm’s operations are cyclical to the core, and we never really know when the next earnings and share-price collapse will arrive.

That rules the company out as a long-term investment in my book — if you are thinking of retiring on Aviva, think again, unless you plan to trade the shares along the way to benefit from the ups and downs.

 White-knuckle investing

The volatility of the shares makes me dizzy. They went to 1100p in year 2000, down to 350p during 2002, then up again to 850p in 2006, and plunged to 150p at the beginning of 2009. Earnings followed a similar pattern over the period, although share-price movements preceded earnings’ results most times, thanks to the forward-looking nature of the stock market.

Aviva talks well about the traction of its turnaround and its opportunities for growth, and the business is indeed growing right now. However, a lot of what we are seeing is ‘normal’ cyclical recovery, I reckon, and further volatility lies ahead, particularly if we adopt a long-term investing mind-set.

The ‘inevitability’ of such volatility, where share prices and profits waver up and down without really making much forward progress over all, keeps me away from Aviva shares.

What next?

As a financial company, Aviva operates in a cyclical industry and forward profits and cash flow will likely fluctuate with the ups and downs of the wider economy, and that’s why the firm doesn’t attract me as a capital-growth investment.

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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.