The Aviva (LSE: AV) share price has been hit very hard by the coronavirus pandemic. After starting the year at 423.6p, the stock has fallen to levels not seen since 2009 and is currently down around 34% from the start of the year.
As a matter of fact, regardless of the pandemic, Aviva has struggled in recent years and its share price has been stuck in a tight range since 2014. With that in mind, in the midst of every crisis lies a great investment opportunity. Let me explain why I think Aviva shares are a bargain right now.
Aviva share price problems
The UK-based insurance company faces two main problems – the coronavirus pandemic that has lowered the demand for new insurance policies, and the ongoing Brexit situation that creates uncertainty, especially for financial-related companies. Further, Aviva is facing an embarrassing £450m rebuke over preference shares from the FCA.
So far, I believe the company was a bit passive in its response to the coronavirus crisis and the drop in revenues. Besides the new appointment of Amanda Blanc as the company’s new CEO, we haven’t heard too much from Aviva.
Looking ahead, there’s no doubt that another economic turmoil could increase the uncertainty for Aviva’s investors. But at the same time, a rebound in Q3 would be unsurprising with the stock market recovery currently in action and the expected British government stimulus deal to maintain the economic momentum.
Ultimately, the pandemic has a double sword effect on insurance companies like Aviva. While the coronavirus adds uncertainty to the sector’s outlook, coronavirus-related claims may not be covered by insurance companies, and the demand for insurance policies is actually expected to rise.
Aviva: time to buy?
While the factors above remain important, they are already priced in the stock valuation. Aviva, which has operations in Europe, Asia, and North America, is still a huge company by any standard, with a market capitalisation of slightly above £11bn.
More importantly, Aviva reported a record of £3.2bn in operating profits in 2019 and the company’s financial performance in the first half-year of 2020 was relatively strong. This has led to the board’s decision to pay a second interim dividend of 6p per share for 2019, which basically means that Aviva is once again a paying dividend stock. To further support Aviva’s financial stability, just a week ago Fitch Ratings has affirmed that the outlooks are stable and Britain’s second-largest insurer was rated at AA.
In my opinion, Aviva operates in an industry that will allow it to get stimulus funds if needed. And as governments continue to pour money into the markets, it is more than likely that we’ll see the Aviva share price rebound to pre-Covid 19 levels within the next one to five years. Evidently, the stock’s price-per-earnings ratio of 5.18 is way below the average in the industry and implies that the share price is undervalued.
The bottom line is that I think Aviva shares look like a bargain right now. Considering the company’s outlook, I believe they could rise by at least 20% from current levels.
Tom Chen 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.