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Why I think the Aviva share price could be worth 50% more after today’s big news

Today, the new CEO of insurance giant Aviva (LSE: AV), Maurice Tulloch, revealed his strategic plan for the business over the next few years. Tulloch wants to create a “simpler, more competitive and more commercial” Aviva. To do so, he’s planning to slash costs as well as dividing the business in two.

A plan for growth

As part of the plan, over the next few years, the company wants to cut 1,800 jobs in an effort to save a total of £300m. As well as these cost reductions, Tulloch is going to split Aviva’s core UK business into two parts: general insurance and life insurance.

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These two divisions were merged back in 2017 when the previous management decided the group needed to slim down. City analysts have been speculating Aviva will reverse the change for some time. Some have even gone so far as to suggest that the business might break itself apart, becoming two separate listed companies, one concentrating on general insurance and the other on life insurance.

Such a split could unlock a lot of value for investors. The market often gives general insurance businesses a higher rating compared to life insurance groups because trying to predict the long term earnings streams that come from the latter can be quite complex.

At the time of writing, the average P/E multiple of the UK General insurance industry is 11.2, compared to around 8 for Europe’s largest life insurers, Legal & General, NN Group and Aegon. Shares in Aviva are currently dealing at a forward P/E of 6.7, which is a steal in my eyes.

Unlocking value

While it’s possible the decision to split the company’s two main businesses could be a precursor to a full break-up, I don’t think management will pursue this course of action anytime soon.

Still, I think the strategic plan will help give it more direction, particularly with independent managements running each division. Industry veterans will take up key positions, including Angela Darlington, who will head the UK life insurance business after running the whole UK business since April.

The general insurance division will be run by Colm Holmes, an insider who used to run the group’s insurance division before being appointed the head of Aviva’s Canadian business in January 2017.

A new direction

Aviva has lacked direction for some time, which is why the shares have languished over the past 12 months. With a new plan for growth in place, I think investors could start to return to the company, especially if this plan translates into earnings growth.

In the base case, this could mean an upside of nearly 20% for shareholders if Aviva’s valuation returns to the industry average P/E 8. However, in the best case, I reckon the stock could surge to more than 600p, giving an upside of nearly 50% from current levels if Aviva’s strategic plan translates into explosive earnings growth.

At this level, I’m assuming the stock’s valuation rises to around 10 times earnings, which isn’t particularly dear but is a slight premium to the industry average.

On top of this potential capital growth, shares in Aviva also support a dividend of 7.9% at the time of writing. With such hefty returns on offer, Aviva looks to me to be an excellent investment for your portfolio today.

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Rupert Hargreaves owns shares in NN Group. 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.