Aviva plc: The One Stock I Would Buy For 2015

I’ve been pondering my favourite stocks ahead of 2015, and I reckon we have a fair number with great prospects for next year.

ARM Holdings shares, for example, have uncharacteristically stagnated this year and are on their lowest P/E for years. I think there’s plenty more to come from our housebuilders too, with Persimmon my personal pick, and BAE Systems also looks a bargain to me with its very full order book and modest share rating.

But if I have to go for one, it’s Aviva (LSE: AV) (NYSE: AV.US), for its combination of growth and dividend potential coupled with a nice safety margin.

After the crunch

The life insurer was hit hard by the financial crunch and its earnings per share (EPS) crashed by 82% over three years. And the company, rather foolishly, failed to reduce its dividends to something affordable — and by 2011 the 26p per share (for an 8.6% yield) was only 43% covered by earnings. By 2013 the dividend had been slashed to 15p per share, and with recovering earnings, cover was already back up to 1.47 times.

We’re looking at forecast doubling of EPS to 47p for the year just about to end, and judging by the firm’s Q3 update that’s likely to be close to the truth after chief executive Mark Wilson told us that “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%“.

He also introduced a prudent bit of caution, adding that “there is still more to do before we can be satisfied we are fully delivering on our investment thesis of cash flow plus growth“.

Aviva is steadily winning new business, including nice gains in Europe and Asia, and even UK life insurance returned to growth in the third quarter. Prospects for the business, then, look very sound.


But with the share price up 10% to 495p over the course of 2014 so far, where’s the safety? Well, even after that, we’re still looking at a P/E of only 10.5, and with the FTSE 100 average around 14 that does not look too stretching to me.

Dividends are already coming back too, with yields of 3.5% and 4% penciled in for this year and next, and those beat the FTSE average too. And the key thing is that cover by earnings would be very strong at those levels — 2.8 times and 2.5 times for 2014 and 2015 respectively.

So even if earnings don’t grow as quickly as predicted, or there’s a dip one year, there is still plenty of scope for strong dividend recovery supported by healthy cash flow, with what I see as very little risk.


Overall then, I see a well-managed company whose fundamental performance is improving, and whose share price valuation is very modest — especially in the light of that well-covered and growing dividend.

Would an attractive insurer like Aviva fit well in a decent retirement portfolio?

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