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Why Aviva plc Could Be The Best Growth-And-Income Stock In The FTSE 100!

It’s rare that you see a stock offering strongly-rising dividend income, and whose shares also look like they’re set for strong growth — and it’s exceptional if it’s a big FTSE 100 company!

But I reckon we’ve found one in Aviva (LSE: AV) (NYSE: AV.US). Even though Aviva shares are up 47% over the past two years, at 509p today, they still look like a pretty good bargain to me on both fronts.

Dividend storming back

Looking at the dividend first, it was famously slashed mid-2012, and plunged to 15p per share by 2013, from a peak of 26p in 2011. The yield was chopped from an unsupportable 8.6%, but shareholders still pocketed 3.3% in 2013, even though the share price had recovered from the shock by year-end. That was still ahead of the FTSE 100 average, even while the company was going through a tough patch!

Forecasts suggest a 12% rise in the dividend this year to 16.8p, on the back of earnings per share more than doubling. The yield would drop to 3.1% as the share price is up 17% in the past 12 months, but if the current 2015 consensus for a further 15% hike to 19.3p comes true the yield would be back up to 3.6%.

Those aren’t yields that would match the 5% being offered by the likes of competitor Legal & General, but it’s still early days for Aviva’s dividend recovery and it’s likely to be very well covered by earnings — 2.8 times this year and 2.6 times next, which is way ahead of the sector.

What Aviva says

The evidence from the firm itself to support these forecasts is strong too, after the interim dividend was lifted by 4.5% to 5.85p per share. As Aviva continues with its so-far-successful turnaround, the firm told us that “Looking forward, our focus will shift from primarily balance sheet repair and capital conservation to cash flow and earnings growth“, which is exactly what’s needed to support future dividend rises.

And at Q3 time, chief executive Mark Wilson said “Aviva’s turnaround is delivering. Our key metrics have improved again. Year to date, our net asset value is 10% higher; value of new business is up 15% and the general insurance combined ratio improved to 95.9%“.

Share price growth too?

Despite the relatively rosy position Aviva now finds itself in, its shares are still on a P/E of under 11 based on year-end expectations, dropping to 10.3 on 2015 forecasts. That’s significantly cheaper than Legal & General, whose shares are trading on a ratio of 14.5 dropping to 13.3 — and Legal & General’s superior dividend yield does not justify the difference to me as it is only around 1.5 times covered by earnings.

I think a P/E of 15 or more could easily be justified by Aviva’s medium-term potential, which would imply a share price of around 700p — more than a third higher than it is today.

A combination of dividends and growth like Aviva's could even help power you to millionaire status!

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Alan Oscroft 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.