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Why the Aviva share price could smash the FTSE 100 this year

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Having risen by 10% in the last three months, Aviva (LSE: AV) has enjoyed a period of outperformance of the FTSE 100. It is 4% ahead of the index and appears to offer the potential to beat it over a long time period.

The company seems to have a solid strategy and a low valuation. Its dividend growth potential also appears to be high and as such, now could be the perfect time to buy it alongside a FTSE 250 company with long-term income appeal.

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Improving prospects

Having made major changes to its business model in recent years, Aviva now appears to be in a relatively strong position to deliver earnings growth. The company’s restructuring has been significant, but has enabled it to access core markets and growth markets alike. This could lead to an improving financial outlook, with the company being well-placed in stable markets and emerging markets at the present time.

One potential catalyst over the medium term could be acquisitions. The company recently announced that it has around £3bn of excess capital which it is seeking to deploy over the next two financial years. This could mean that part of that sum is used for acquisitions – especially in the digital sphere. This could help to improve customer loyalty, while also allowing the company to remain highly innovative at a time when the industry is undergoing a period of rapid change.

Financial appeal

With Aviva trading on a price-to-earnings (P/E) ratio of around 11, it seems to offer a wide margin of safety. The company is expected to yield 6% in the next financial year and since dividends are covered 1.9 times by profit, they seem to be highly sustainable. This suggests that dividend growth could be high – especially since the company is due to report a 7% rise in earnings in the next financial year.

Of course, Aviva is not the only dividend growth stock which could be worth buying right now. Reporting its half-year results on Tuesday was FTSE 250 technical products specialist stock Diploma (LSE: DPLM), which appears to have a bright income future.

Improving outlook

Diploma’s first half has been relatively positive. Revenue has increased by 8%, while adjusted operating profit has risen by 9%. It was able to capitalise on a strong global trading environment, with it delivering good performance despite currency headwinds.

Acquisitions look set to remain a key growth area for the business. While M&A activity has been limited in recent months due to stronger trading conditions, the company’s acquisition pipeline remains healthy.

Looking ahead, Diploma is forecast to report a rise in its bottom line of 10% in the current year, followed by further growth of 5% next year. Dividends per share are expected to rise by 19% over the next two years and while the company may have a forward yield of just 2.3%, dividend payments are covered 2.1 times by profit. This suggests that further growth could be ahead over the medium term, which may have a positive effect on the company’s share price and allow it to outperform the wider index.

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Peter Stephens 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.

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