The Stock Picker’s Guide To Aviva Plc

A structured analysis of Aviva plc (LON:AV).

| 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.

Successful investors use a disciplined approach to picking stocks, and checklists can be a great way to make sure you’ve covered all the bases.

In this series I’m subjecting companies to scrutiny under five headings: prospects, performance, management, safety and valuation.How does Aviva (LSE: AV) (NYSE: AV.US) measure up?

1. Prospects

Aviva is the only UK composite insurer. Life business contributes two thirds of operating profit. Half of new business comes from the UK, with Europe contributing 40% and South East Asia 10%.

Life firms such as Legal & General and Standard Life are shifting towards an asset-light business model, but Aviva is significantly dependent on investment returns.

The UK general insurance market is overcrowded and competitive, with premiums subject to the insurance cycle.

Aviva’s strong brands and franchise have been squandered. New management is implementing a turnaround plan to strip out costs and bureaucracy, reduce gearing and bolster capital, and focus on higher margin businesses. The US business is being sold to realise £1.6bn cash.

2. Performance

Aviva has found revenue growth elusive, and profits have been erratic. That has led to several dividend cuts since the late 1990s, most recently last March.

The latest half-year results indicate the turnaround plan may be starting to work, with expenses down and cash flow up.

3. Management

After the ousting of former CEO Andrew Moss, chairman John McFarlane inaugurated the turnaround plan and made significant strides in selling off businesses.

The new highly regarded CEO, Mark Wilson, has carried on implementation with the added bite of the dividend cut and recruitment of some ruthless top brass.

4. Safety

Aviva has relatively high gearing for the sector, with debt-to-tangible equity of 50%. It’s targeting a reduction to 40% in part from the proceeds of the US sale. Exposure to Europe and dependence on investment returns also add to risk.

The US sale will boost the capital surplus to within its target range. However, Aviva has recently been identified as one of nine insurers that are ‘Global Systemically Important Financial Institutions’. Apart from being required to maintain a ‘living will’, that’s expected to increase the required capital surplus.

5. Valuation

Aviva shares are trading at a discount of 25%-30% compared to Prudential, Legal & General and Standard Life, based on its prospective P/E of 10. They are also at a discount of around 10% to the MCEV net asset value, the measure preferred by the actuarial profession.

Rebased, the dividend yield is 3.8%, lower than Legal & General and Standard Life.

Conclusion

Whether Aviva is a value play or a value trap depends on the success of its turnaround plan, which the CEO acknowledges will be a long haul. Early signs are encouraging, but exposure to the eurozone and financial markets generally means the shares are not without risk.

For a safer dividend, I recommend that you take a look at the Motley Fool’s top income stock. It’s yielding well over 5%, yet it has one of the safest dividends in the FTSE 100. That’s a great yield to lock in. You can read all about it by downloading an exclusive free report.  Just click here.

> Tony owns shares in Aviva and Prudential but no other shares mentioned in this article.

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.

More on Uncategorized

Uncategorized

New look. Same Foolish investing.

Maybe you already noticed — things are looking a little different around here. At the top corner of our site,…

Read more »

Uncategorized

We have some exciting news!

You could even say it’s 25 years in the making...

Read more »

Uncategorized

Tesco PLC Is Doing All The Right Things And I’m A Buyer

I’m a big fan of how Tesco PLC (LON: TSCO) is turning itself around and here’s why…

Read more »

Uncategorized

What’s Stopped Me From Buying Gulf Keystone Petroleum plc Today

Royston Wild considers the investment case for Gulf Keystone Petroleum plc (LON: GKP).

Read more »

Uncategorized

Dow Futures Fall Ahead Of Durable Goods Report

Stock index futures ahead of this morning's durable goods orders report indicate that the Dow Jones and S&P 500 may…

Read more »

Uncategorized

What’s Stopped Me From Buying BHP Billiton plc Today

Royston Wild considers the investment case for BHP Billiton plc (LON: BLT).

Read more »

Uncategorized

3 FTSE Shares Hitting New Highs: National Express Group PLC, Brammer plc and Hilton Food Group plc

National Express Group PLC (LSE: NEX), Brammer plc (LON: BRAM) and Hilton Food Group plc (LON: HFG) set new records.

Read more »

Uncategorized

Should I Buy Legal & General Group Plc?

Legal & General Group plc (LON: LGEN) has seen its share price rise 50% in the last 12 months, Harvey…

Read more »