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The Aviva share price is 30% cheaper than in January! Why I think it’s a must buy

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The Aviva (LSE:AV) share price is steadily working its way back to 300p. But even at today’s prices, the UK’s largest insurance company is 30% cheaper than it was at the start of 2020.

This isn’t a huge surprise to me.

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I believe the London-headquartered financial giant is one of the FTSE 100’s strongest companies. But the market has consistently underpriced it.

The Aviva share price is currently trading at a price-to-earnings ratio of 4.4. That’s insanely cheap, given its strength. If we look ahead to what the future holds, the forward P/E is expected to jump to 5.4.

That’s why I’m adding to my Aviva shareholding now. If I wait, I’ll only pay more for the same number of shares.

Aviva share price value

One of the key principles of UK value investing is this: at times the markets will significantly undervalue quality FTSE 100 shares.

So the value investor makes their best portfolio gains when they see what the wider market can not – that markets are consistently inconsistent.

In some years they are wildly optimistic about the a company’s future prospects. And in other years they are wildly pessimistic. We appear to be in the latter stage for the Aviva share price. And that gives investors an opportunity to profit.

We need only look back to previous Aviva P/E ratios to prove this theory.

In 2015, investors would have paid an average 10 times earnings to buy Aviva shares. The following year, the price tag doubled to 22 times earnings. Twelve months later, the Aviva share price was going for a whopping 31 times earnings.

The level you can buy the Aviva share price at today simply didn’t exist in the past.

Looking forward

I thought Aviva’s previous CEO, Maurice Tulloch, did a reasonable job. But his replacement Amanda Blanc looks like a great appointment for shareholders. Blanc has been on the Aviva board since January and has a solid grasp of what’s required to take the FTSE 100 insurer back to where it should be.

Blanc formally took over on 6 July, so she has only been in the post a matter of days. But the ex-Zurich and Axa boss has already signalled a strong intent to streamline the business.

In November 2019, Tulloch sold off Aviva’s Hong Kong arm but disappointed investors by not divesting the Chinese and Singapore businesses too.

We will look at all our strategic opportunities, and at pace,” Blanc said on taking up the top job. “I want Aviva to be the leader in our industry again and the first choice for our customers and partners,” she added.

It’s a slimmer, more agile, more focused Aviva that I think will attract shareholders back. And I’m confident in Blanc’s ability to overhaul its structure.

Income theory

I’m not too concerned that Aviva suspended its 2019 full-year dividend.

While it was certainly a blow for long-term holders, it made financial sense at a time of huge uncertainty. And in April 2020, Aviva’s board made specific mention that they “fully recognise the importance of cash dividends to our shareholders“, adding that they will reconsider the decision in Q4 this year.

With Blanc in charge to slim down, cut costs, and boost profits, I’m certain that it will return in full.

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Tom Rodgers owns shares in 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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