Despite a positive three-quarter trading update last month, Aviva’s (LSE: AV) (NYSE: AV.US) share price seems range-bound, swinging by about 50p around the 500p level it reached during March.
Investors enjoying the composite insurer’s rise from around 300p in early 2013 could be frustrated; but I think it’s logical that the shares have stalled, on valuation grounds.
Where’s the forward growth?
City analysts following the firm expect adjusted earnings to rise just 6% during 2015. At the current share price around 533p, the forward P/E rating runs at almost 11 and there’s a 3.6% forward dividend yield. The firm seems priced to perfection, so why should the share price go up any faster than that 6% expected growth rate?
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The overarching consideration with a financial company such as Aviva is its cyclicality. Last year’s rapid profit advance seems like recovery from a cyclical bottom. Earnings are roughly back to where they were in 2009, so the recovery has happened, which makes further fast-paced advances in the share price look unlikely.
The figures are good
Aviva reckons its performance continues to improve as the firm focuses on maximising the benefits of its composite nature and building a leading digital proposition. The directors like to emphasise the measures of cash flow and growth to gauge progress, so how is that going?
Three quarters through the year, operating capital generation came in at £1.3 billion, the same as the year-ago figure. Value of new business is up 3% at £690 million, and the combined operating ratio scored around 96%, down 1% signalling improved underwriting profitability.
The firm says that economic and regulatory environment is still challenging, but Aviva is in an entirely different position to where it was a few years ago. The directors think Aviva is starting to demonstrate consistency in its results, and their focus is to address outstanding issues and complete the firm’s turnaround.
However, I’m not convinced there’s much left for investors to go for. A lot of Aviva’s ‘turnaround’ is just recovery from a natural cyclical bottom. There’s no great shift in strategy promising sustainable growth through the ups and downs of the macro-economic environment. Going forward, Aviva will be as constrained as ever by its cyclicality.
What next?
One figure worth noting is Aviva’s 10% improvement in net asset value to 298p per share. Let’s just reflect for a moment on how far from that the recent 533p share price has risen…
I’m steering clear of Aviva because it’s not a defensive investment proposition. Other firms on the London stock market enjoy strong trading franchises that can really drive wealth creation if we buy the shares at sensible prices.
