The Aviva (LSE: AV) share price has risen about 45% in the past year. I believe the positive financial results and the restructuring of its business under the new CEO Amanda Blanc led the share price to rally.
Here, I further analyse the pros and cons of investing in this FTSE 100 company.
The bull case for Aviva share price
Aviva reported 2020 operating profits of £3.2bn. This was broadly in line with last year’s results. In my opinion, the profits are good when considering the negative impact of the Covid-19 pandemic. The company’s earnings per share rose 10% year-on-year to 70.2p.
Aviva’s bulk purchase annuity business growth is strong. It grew by 48% year-on-year to £6bn in this year. Management is confident that Aviva’s financial strength as well as expertise in the annuity business, will help it to further succeed in this growing market. The general insurance business has also done well, as the net written premiums rose 10% to £2bn.
Aviva recently completed the sale of its Polish business to Allianz for £2.1bn. This is the last of the planned sale of non-core parts of the business. The company had earlier planned to sell non-core assets worth £7.5bn. It plans to reduce its debt with proceeds, which should help to improve its capital structure. It also plans to make a substantial return of capital to shareholders.
Aviva has a stable capital structure. Last year, the company announced a new dividend policy and capital framework. It aligns with the strategy to focus on core markets of the UK, Ireland, and Canada. The company plans to gradually increase the dividends. For the year 2020, the company declared a dividend of 21p. At the current market price, the dividend yield is 5.25%. However, there is no guarantee that the company will continue to pay future dividends.
The bear case for Aviva share price
Aviva has sold most of its international business in order to concentrate on its core markets. However, if the core markets like UK and Ireland businesses do not perform as expected it will have an impact on the entire group’s business. Previously, it was more geographically diversified.
On the other hand, there is no guarantee that the management can effectively use the capital. It has to rightly invest the money in growth areas. Also, we are yet to ascertain the long-term results of the sale of these businesses on the group’s profits.
The insurance sector is getting very competitive. With modern technology, consumers can easily compare the insurance premiums of various companies. Nowadays, with the wide choice, consumers often choose the lowest price. This will put pressure on the company’s profits.
The company has efficient risk management. However, it is not immune to credit risk, investment risk and liquidity risk, among others, due to some adverse uncertain events.
Final view
Aviva has been successful in selling its non-core assets. It has a good capital structure. The shares are currently trading at a price-to-earnings ratio of 5.75. This makes me believe that it is a value buy for my portfolio.
