Growth and income machine Aviva plc is a terrific core portfolio holding

Insurance giant Aviva (LSE: AV) has found its feet after a number of unsteady years, and today’s rock solid results consolidate the trend.

Viva Aviva!

Aviva is back. Or as group chief executive officer Mark Wilson pithily puts it: “Aviva is delivering.” Today’s first-half results show the company raising operating profit for the fourth year in a row, this time by a meaty 11% to £1.47bn, which reflects positive performances across its worldwide businesses.

The company is beneftiting from geographic diversification, increasing sales right across the group including the UK, Europe and Aviva Investors. Wilson hailed top line sales and bottom line profit in UK general insurance, pensions, annuities and protection: “Our digital business continues to make progress, making insurance simpler and more convenient for customers.” 

Today’s report also showed operating earnings per share up 15%, IFRS profit after tax soaring from £201m to £716m year-on-year, and a 27% rise in the value of new business to £596m. Aviva looks financially solid, maintaining its financial strength with Solvency II coverage ratio of 193%, up from 189%, with a capital surplus £11.4bn, up from £11.3bn. Group assets under management now total £475bn, up from £450bn.

Investor rewards

This continues Aviva’s strong recovery, which has seen the company’s share price rise nearly 40% over the past 12 months. Investors who stuck by the stock after it halved its dividend in August 2013 to finance its turnaround strategy have been rewarded for their loyalty, as short-term pain turns into long-term gain.

Today, Aviva announced that it was increasing the interim dividend per share by 13% to 8.4p. The stock now yields 4.31%, and as we have seen today, it has plenty of scope for progression. Wilson announced a £300m share buy-back in May and by the end of July had implemented over one third of the programme. It should be completed by the end of 2017, further rewarding investors.

Turn on, tune in, turnaround

With these results, I get the feeling that we have reached the end of a process. The crisis has passed, the turnaround is largely complete, which is of course good news. However, investors will be asking what happens now. Today’s results were welcome but they were also priced-in and the share price barely moved. Investors cannot expect the shares to jump another 40% over the next 12 months, unless Wilson can deliver something fresh.

He has done the right thing by getting back to basics, simplifying the company’s structure, delivering healthy organic growth and building its digital operation. Will it now be steady as she goes, with Wilson delivering further fireworks-free growth and further rewarding shareholders with dividend progression and share buybacks? Or will he choose to be a little more ambitious?

Life decisions

Aviva generated £1.2bn of capital in the first half of 2016, and has followed this up with another £1.1bn this year. That gives it plenty of ammunition if Wilson wants to go on an acquisition spree instead, or pioneer new markets. This would be a riskier strategy but might also drive profits and dividends in the longer run. He has certainly earned the right to try. Whether you are after income or growth, Aviva should deliver on both fronts.

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Harvey Jones owns shares of Aviva. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.