The Motley Fool

Is it time to pile into the Aviva share price?

It’s hard to find a bearish Fool article on composite insurer Aviva (LSE: AV) over the past year or so, yet since I last wrote about the firm in March with my own bearish take on the company, the share price has fallen more than 17%.

At around 426p today, the share price throws up a forward price-to-earnings ratio for 2019 of around 6.8 and the forward dividend yield is knocking on the door of 8%. It wouldn’t surprise me if we were to see a bounce from this latest plunge, but I still think the longer-term prospects for the share price, profits and the dividend are far less attractive than they appear to be at first glance. I also think there’s a lot of downside risk for investors from the current level of the shares, so I’m avoiding the stock, despite its recent plunge.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

A turnaround that has turned

This month, news came through that chief executive Mark Wilson will step down after sticking around until April 2019 to assist with a “planned and orderly transition.” Aviva brought in Mr Wilson during January 2013 to turn the business around. Prior to that, the firm had been floundering since crashing so hard in the wake of last decade’s credit crunch, just like many other cyclical businesses did. Aviva said in the news release that under Mr Wilson’s leadership, it was reshaped to “significantly improve” its financial performance and balance sheet.  The company narrowed operations from 28 markets to 14, grew operating profit, focused on areas of competitive strength and invested in new initiatives such as digital. 

However, the directors, including Mark Wilson, think the turnaround “has been successfully completed,” and they believe new leadership should drive the “next phase” of development.  So, the turnaround trade with Aviva is over. How did shareholders do? Since January 2013 the share price is up around 14%, which seems poor return from a turnaround of almost six years duration. I would have expected much more. The dividend take during the period adds another 28% or so to the total return for investors, but I still think the outcome has been lacklustre.

A shrinking valuation

The main problem has been the shrinking valuation over the period, which has led to the price-to-earnings rating getting ever smaller and the dividend yield ever larger. That valuation compression effect has acted as a real drag on the total return for investors. But I think it is normal for great big cyclical enterprises such as Aviva. I reckon the stock market is marking down the valuation just as profits rise because it’s trying to discount peak profits for the firm. Just as with earnings, the dividend and the share price plunged back in 2008. We could see a similar cyclical down-leg again, we just don’t know when, but we do know that it will be preceded by a period of high profits, otherwise it wouldn’t be a cycle.

With the turnaround behind us, I think Aviva is less attractive than it was before, despite the high dividend yield, the low valuation and City analysts’ predictions of earnings growth. rather than playing Russian Roulette with Aviva, I’d prefer to use the current stock market weakness to drip money into a FTSE 100 tracker fund, which would iron out single-company risk.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

Kevin Godbold has no position in any of the shares 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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.