Having fallen by 5% in the last year, the Aviva (LON: AV) share price may not be an obvious choice for income investors. After all, the stock does not seem to be popular among investors, and it would be unsurprising for its valuation to underperform the FTSE 100 in the near term.
However, with the company having put in place what seems to be a sound business model following major restructuring in recent years, the prospects for the stock seem to be improving. As such, now could be the right time to buy it from an income perspective, with a smaller dividend share that reported positive news on Tuesday also offering investment potential.
Growth potential
The smaller company in question is property investor and developer Town Centre Securities (LSE: TOWN). It released news of an acquisition on Tuesday, purchasing The Cube in Leeds for £12m. Completion is set to take place in October, with the purchase due to be funded from the company’s existing resources and planned disposals. The deal represents an initial yield of over 12.5% on the passing income, although the yield will reduce to around 9% after lease expiries in 2019 and 2020. Still, this remains a relatively enticing level for a city-centre asset.
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With Town Centre Securities having a dividend yield of 4.3%, it seems to offer income investing potential for the long term. Although the company is UK-focused and could experience some uncertainty in the near term due to Brexit, its acquisition pipeline means that it may be able to capitalise on low valuations across the commercial property sector. As such, and with a price-to-book (P/B) ratio of 0.8, it seems to offer an impressive investment outlook.
Improving business
Aviva’s income potential also appears to be impressive. The company recently announced that it has been able to generate excess capital that is expected to be deployed over the next two financial years. So far, this has helped to reduce the company’s leverage, while a portion of the capital has been earmarked for acquisitions. This could help to further diversify the company’s operations and may lead to improved growth performance over the medium term.
Due in part to its disappointing share price performance, Aviva has a dividend yield of around 6% at the present time. This is expected to rise to around 6.8% next year, with dividend growth of 13% forecast in the next financial year. Beyond 2019, further dividend growth could be ahead, with the potential for additional excess capital generation as well as a more generous payout ratio.
With Aviva having a price-to-earnings (P/E) ratio of around 10, the stock seems to offer a wide margin of safety. Alongside its international exposure, improving business model and rising dividend, this could help it to outperform the FTSE 100 in the long run. It seems to offer a strong income investing opportunity at the present time.
