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Is the Aviva share price heading for 600p?

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With a yield of 5.6%, FTSE 100 insurer Aviva (LSE: AV) is a popular choice with dividend investors. But the firm’s shares have fallen by 11% since peaking at 552p in May. So do problems lie ahead?

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Finding value overseas

FTSE 250 asset manager Ashmore Group (LSE: ASHM) focuses on finding value opportunities in emerging markets. On Friday the company’s chief executive, Mark Coombs, said that a recent sell-off in emerging markets “has created significant value opportunities”.

Mr Coombs’ comments provided an upbeat ending to a slightly mixed quarterly trading statement. During the three months to 30 June, the value of the firm’s assets under management fell by $2.6bn to $73.9m. This overall shift had two parts — a net inflow of $2.6bn of new customer money, and a $5.2bn “negative investment performance”.

What this shows is that customers continued to invest fresh cash as the value of the firm’s investments fell. This suggests to me that many of these investors share Mr Coombs’ view that the recent slide in emerging markets has created attractive buying opportunities.

Time to buy?

I don’t have a strong view on emerging markets. It’s a specialist area. But Mr Coombs’ firm does have a solid track record of generating shareholder returns from such investments. The group has held or increased its dividend every year since 2007.

And in 2017, Ashmore generated a return on equity of about 23%. That’s an impressive figure that’s consistent with previous years. Cash generation is also good and the group ended last year with unrestricted net cash of £420m and regulatory capital of £559.4m, five times its required minimum of £111.1m.

 Although dividend growth has been slow, the shares currently trade on a forecast P/E of 16.8 with a prospective yield of 4.6%. I think this stock could be a decent buy for investors wanting to diversify their dividend income.

Growth problems?

One possible reason why Aviva’s share price has lagged the FTSE 100 by about 10% over the last year is that the group’s growth potential seems limited.

Growth is important to most businesses, even if they’re fairly large and mature. But at the right price I’m happy to buy low-growth businesses for income, as long as they have strong balance sheets and are performing well.

In my view, Aviva ticks both of these boxes. In 2017, operating profit rose by 2% to £3.1bn. Operating earnings per share climbed 7% to 54.8p and the dividend was lifted 18% to 27.4p, the fourth consecutive year of double-digit growth.

Chief executive Mark Wilson also announced plans to deploy £2bn of surplus cash in 2018. Of this, £900m is being used to repay expensive debt, saving £60m in interest payments. About £600m was earmarked for potential acquisitions, with £500m planned for shareholder returns.

I’d buy

Returns so far have exceeded this promise, as the group is currently midway through a £600m share buyback. With the stock now trading under 500p, I believe this should deliver good value and help to support future earnings growth.

The shares now trade on just 8.6 times forecast earnings, with an estimated yield of around 6%. At this level, I believe Aviva offers good value for income investors.

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Roland Head 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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