A 25% Potential Gain Suggests Now Is The Right Time To Buy Aviva plc

avivaAviva (LSE: AV) (NYSE: AV.US) has outperformed the FTSE 100 so far this year: the insurer’s shares remain up by 10% on the start of the year, despite falling by more than 5% over the last month.

The question for shareholders like me is whether Aviva remains a buy, or whether the firm’s recovery is already priced into the shares.


Let’s start with the basics: how is Aviva valued against its past earnings, and the market’s expectations of future earnings?

P/E ratio

Current value

P/E using 5-year average earnings per share for continuing operations


2-year average forecast P/E


Source: Company reports, consensus forecasts

It’s clear that Aviva’s business has gone through a period of turmoil over the last five years, but things are improving.

Analysts’ consensus forecasts suggest earnings per share of 47.8p this year and 51.7p in 2015, making the shares look cheap at 500p, on a P/E of just under 10.

Shareholders who have suffered multiple dividend cuts over the last decade are also expected to be rewarded, as the firm’s payout is expected to rise to 16.7p per share in 2014 and to 19.1p in 2015 — equivalent to prospective yields of 3.4% and 3.9% respectively.

This puts Aviva’s payout broadly in line with the FTSE 100 average, which is currently 3.6%.

What about the fundamentals?

Aviva’s business has been substantially reshaped over the last couple of years, as chief executive Mark Wilson has gradually executed his turnaround plan for the business, reducing debt, improving cash flow and divesting non-core businesses.

The impact of these changes — and the previous downturn in the firm’s business — has been to shrink Aviva, as these figures show:


5-year compound average growth rate





Pre-tax profit




Book value


Source: Company reports  

These figures cover the 2009 – 2013 financial years. In fairness to Mr Wilson, 2014 is the first year when shareholders will be able to see the initial results of his changes.

Aviva’s first-half figures, published in August, were promising:


H1 2014

Operating profit


Operating expenses


Interim dividend


Book value


We won’t see Aviva’s full-year figures until March 2015, but the insurer is due to release a third-quarter update on 30 October, which should provide some indication of whether these positive trends are continuing.

25% upside?

If Aviva can deliver on current forecast earnings, I believe it offers the potential for a significant re-rating: Aviva is currently valued at around 10 times forecast earnings, compared to a sector average of around 12.5.

This implies Aviva could deliver a further 25% upside to shareholders, if the company’s turnaround plan continues to be successful. In my view, the balance of risk is very favourable, and I continue to rate Aviva as a buy.

Aviva shares are up by 50% in two years. Gains like this -- with dividend income compounded on top -- can enable your portfolio to outperform the market and improve your chances of retiring as one of Britain's 'secret millionaires'.

If you'd like to know more about the techniques used by the Fool's market-beating Share Advisor analysts, then download your copy of "How You Could Retire Seriously Rich" today.

This report is FREE and without obligation and includes a seven-step process that could help you become a millionaire.

Click here now to receive your copy today.

Roland Head owns shares in Aviva. 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.