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Retire wealthy: why I believe the Aviva share price could smash the FTSE 100

Year-to-date, the Aviva (LSE: AV) share price has slumped, underperforming the FTSE 100 by around 7% excluding dividends. 

And the sell-off has intensified over the past three months, although there has been no major negative news flow from the company.

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What’s behind the decline? 

The last time I covered Aviva, I highlighted the risk that so-called lifetime mortgages (LTM), posed to the group’s balance sheet. Concerns surrounding these products seem to be behind at least some of the declines. However, as I said before, even if the Prudential Regulation Authority (PRA) does decide to take action, and forces insurers to hold more capital against LTM products, Aviva could be large enough to take the hit without significant disruption to its business or a dividend cut. 

So, if these concerns are not behind the decline, then what is? It seems a number of factors are to blame. As well as the concerns about LTMs, the company is also currently without a CEO. 

New CEO

Mark Wilson was forced out as CEO at the beginning of this month after several years at the helm. He arrived in early 2013 and presided over the company’s restructuring, which has left it with a strong balance sheet and more focused operations after selling off non-core businesses in North America. 

Aviva has told investors that it will take a few months to find a replacement. During this time, the business will continue on its current course.

Luckily, Aviva’s current course is working exceptionally well for the business. The group is targeting operating profit growth of 5% this year even though it missed expectations in the first half thanks to a higher than expected number of insurance claims as a result of rough weather. 

Nevertheless, where the company really stands out is its bulk annuity business. In this, Aviva takes on pension liabilities from corporate schemes that it can run more effectively with lower costs thanks to economies of scale. A five-fold increase in activity at this division helped offset some of the weather losses. 

Low valuation 

As long as there are no major upsets over the next few months while the company is looking for a new CEO, I believe Aviva’s future is bright.

Based on current City forecasts, shares in the insurance giant are trading at a dirt-cheap forward P/E of just 7.5 and yield 7%. To me, these numbers look too good to pass up. Aviva is now one of the cheapest stocks in the financial sector and is trading at a near-50% discount to its peer average. 

What’s more, a dividend yield of 7% is more than double the FTSE 100 average. In fact, over the past decade, the FTSE 100 has produced an average annual total return of around 8%, indicating that by just buying and holding Aviva, you can beat the FTSE 100.

It might be some time before confidence in the company returns, but when it does, I believe shares in Aviva could rocket higher. In the meantime, investors can pocket a dividend yield of 7%.

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Rupert Hargreaves owns no share mentioned. 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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