After a slow start to the year, shares of the insurance giant Aviva (LSE: AV.) have gained momentum, up 9.1% year-to-date and 19.1% over the past 12 months.
This exceeds the performance of the FTSE100If I had bought Aviva shares a year ago, I would be a happy investor today.
Unfortunately not. But with the share price now at £4.73, I’m tempted. That looks cheap. Would it be foolish not to buy the stock? And should investors consider it too?
Outstanding features
During my research, I noticed a few things. The first is the healthy dividend yield. At 7.1%, it is well above the average for the UK stock index Footsie (3.6%). Last year, the dividend increased by 8%. This is the third year in a row that it has increased. In addition, management announced a new share buyback program worth £300 million while also increasing its dividend forecast for the future.
Dividends are never guaranteed, so when I see yields of 7% or more, I am naturally sceptical. However, I believe Aviva will pay out in the future, given its approach to rewarding shareholders over the past few years.
And then there’s the valuation. The price-to-earnings ratio is currently 12.5. OK, there are cheaper stocks. But I think this looks like a good price for Aviva. It’s a high-quality company and while that’s a little above the Footsie average, it still looks like a good deal. The long-term historical average is around 14, which is another sign that today’s price represents good value.
What happens next?
But what’s next for the company? It has continued to build momentum in 2023. Operating profit rose 9% to just under £1.5 billion, driven by strong performance across numerous business areas such as wealth and insurance premiums. In addition, the £750 million cost-cutting target was met a year ahead of schedule.
But what happens next? Fortunately, CEO Amanda Blanc’s top priority seems to be to further streamline the business and make it leaner and more efficient.
In the past, Aviva was often seen as a company that was too diversified. It concentrated on too many areas in too many regions. And that hurt performance. Under Blanc, that has changed.
In its latest results, the company announced that it had completed the exit of its Singapore joint venture for £937 million, further reducing its geographic presence.
These moves build on Aviva’s already strong competitive advantages, including its outstanding brand name and a customer base of almost 20 million.
The risks
While this is all well and good, rationalisation also brings risks. For example, the company remains dependent on just a few markets, and if these falter, Aviva will feel the impact more than if the company were more diversified.
The insurance industry can also be cyclical and extremely competitive. Insurtechs have grown in popularity in recent years, posing a growing threat to Aviva.
Time to buy?
Nevertheless, I would buy the shares today if I had the money. At £4.73 a share, I think they are a smart investment and offer long-term growth potential.
The high yield is undoubtedly one of the biggest advantages. This would provide a solid source of passive income for my portfolio.
The post 7.1% return! Would it be foolish of me not to buy cheap Aviva shares? first appeared on The Motley Fool UK.
Further reading
Charlie Keough does not own any of the stocks mentioned. The Motley Fool UK does not own any of the stocks mentioned. The views expressed in this article about the companies mentioned in this article are those of the author and as such 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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