2014 has been nothing short of superb for investors in Aviva (LSE: AV) (NYSE: AV.US). Indeed, shares in the insurer have surged by 18% since the turn of the year, easily beating the FTSE 100’s lacklustre performance that has seen it fall by 0.5% year-to-date.
However, does this strong share price performance now mean that Aviva is overvalued and, as a result, will underperform the FTSE 100 moving forward? Or, can Aviva beat the FTSE 100 in 2015?
Valuation
Despite its excellent share price performance in 2014, Aviva does not appear to be overvalued. For example, it trades on a price to earnings (P/E) ratio of 11.4, which seems to be relatively attractive while the FTSE 100 has a P/E ratio of 15.3. This means that investors are still rather cautious when it comes to Aviva’s future prospects, with its turnaround strategy clearly not convincing all investors that it will result in sustained profitability growth. As a consequence, there remains significant scope for an upward rerating to Aviva’s valuation in 2015.
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Dividend Prospects
Historically, Aviva has been viewed as an obvious choice for income seeking investors. However, after slashing its dividend in March 2013, yield-hunters have been left somewhat disappointed and, after its share price gains in recent months, Aviva now yields just 3.1%. That’s lower than the FTSE 100’s yield of 3.3% and, as such, does not hold out a major appeal for income investors.
However, with Aviva’s bottom line now in a much healthier state than it was eighteen months ago, it can afford to increase dividends at a brisk pace. For example, Aviva is forecast to bump up next year’s dividend by 14.6%, which is a hugely attractive growth rate and means that the company could be yielding as much as 3.6% as soon as next year. And, with earnings set to grow by 6% next year and to further rise at a brisk pace in 2016 and beyond, Aviva’s appeal as a dividend play could rise substantially over the medium term and help to improve sentiment in the stock moving forward.
Looking Ahead
Clearly, the success of Aviva’s turnaround plan, where it has rationalised the business, generated efficiencies and streamlined its operations, has caused its performance to improve significantly in a relatively short space of time. Indeed, the disappointing year of 2012 (where Aviva made a loss) seems like a distant memory and the company is now in much healthier shape than it once was.
Furthermore, with there being significant scope for an upward adjustment to its rating, Aviva’s share price could continue to rise in 2015. Certainly, the rapidly growing dividend and the success of its turnaround are clearly causing investors to bid up the price of the company’s shares, with this situation likely to continue next year as Aviva makes further progress under its present management team. As a result, Aviva could beat the FTSE 100 in 2015, just as it has done in 2014.
