Can the Aviva share price double your money?

The Aviva share price is deeply undervalued and could double from current levels argues Rupert Hargreaves.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares in insurance group and long term savings manager Aviva (LSE: AV) look dirt cheap right now. Indeed, shares in the business are currently changing hands at a forward P/E of 6.8 and yield 7.8% — one of the highest dividend yields in the FTSE 100.

By comparison, the rest of the insurance industry is dealing at an average multiple of 11.3, which implies shares in Aviva could be undervalued by as much as 65% from current levels to hit the sector average.

When you add the company’s dividend yield of 7.8% into the equation, it is possible investors could see a total return of nearly 100% over the next few years.

The question I want to try and answer today is, can the Aviva share price really double your money or does the stock deserve its current valuation?

Changing of the guard

After an extended period without a CEO, Maurice Tulloch finally took over Aviva’s management in March. He has since been working flat out ever since to try to restore investor confidence in the business.

Tulloch has announced a cost-cutting plan and is working on the details of separating Aviva’s UK business into two divisions, general insurance and life insurance. This is part of his plan to “crack the complexity” of the Aviva group, which he believes has been holding the company back.

Tulloch is planning to slash costs by £300m, which is equivalent to around 10% of last year’s operating profit. That could mean a big jump in earnings for shareholders if the plan comes off without a hitch. 

Still, at this point, the plan is only in its early stages, and we’ve yet to see any concrete results on either the cost reduction or simplification fronts. Over the next six-to-12 months, we should get some more information from the business detailing the progress made and further actions to be taken. Aviva usually publishes its annual report for the previous year around March. 

Profits rising

In my opinion, the performance of the Aviva share price hinges on the company’s restructuring. If the new CEO can successfully reduce group complexity and cut out unnecessary costs, a 10% increase in operating profit could push the stock higher by 10%, assuming all else remains equal.

If the restructuring does not unfold as envisaged, the Aviva share price could continue to languish at current levels. Nonetheless, even in this scenario, investors will still be entitled to that 7.8% dividend yield.

On that basis, I reckon the Aviva share price is likely to return a minimum of 7.8% over the next 12-months, and possibly 18% to 20% if profits receive a boost from cost-cutting efforts. If Tulloch and team successfully execute their restructuring plan, then it is also highly probable that the market will also award the stock a higher earnings multiple. Although, it is difficult to say with any certainty if this will really happen right now.

So overall, I think it is highly likely the Aviva share price will produce a positive return over the next 12 months. However, I reckon it is unlikely the stock will double your money.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »