It’s hard to find a bearish Fool article on composite insurer Aviva (LSE: AV) over the past year or so, yet since I last wrote about the firm in March with my own bearish take on the company, the share price has fallen more than 17%.
At around 426p today, the share price throws up a forward price-to-earnings ratio for 2019 of around 6.8 and the forward dividend yield is knocking on the door of 8%. It wouldn’t surprise me if we were to see a bounce from this latest plunge, but I still think the longer-term prospects for the share price, profits and the dividend are far less attractive than they appear to be at first glance. I also think there’s a lot of downside risk for investors from the current level of the shares, so I’m avoiding the stock, despite its recent plunge.
A turnaround that has turned
This month, news came through that chief executive Mark Wilson will step down after sticking around until April 2019 to assist with a “planned and orderly transition.” Aviva brought in Mr Wilson during January 2013 to turn the business around. Prior to that, the firm had been floundering since crashing so hard in the wake of last decade’s credit crunch, just like many other cyclical businesses did. Aviva said in the news release that under Mr Wilson’s leadership, it was reshaped to “significantly improve” its financial performance and balance sheet. The company narrowed operations from 28 markets to 14, grew operating profit, focused on areas of competitive strength and invested in new initiatives such as digital.
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However, the directors, including Mark Wilson, think the turnaround “has been successfully completed,” and they believe new leadership should drive the “next phase” of development. So, the turnaround trade with Aviva is over. How did shareholders do? Since January 2013 the share price is up around 14%, which seems poor return from a turnaround of almost six years duration. I would have expected much more. The dividend take during the period adds another 28% or so to the total return for investors, but I still think the outcome has been lacklustre.
A shrinking valuation
The main problem has been the shrinking valuation over the period, which has led to the price-to-earnings rating getting ever smaller and the dividend yield ever larger. That valuation compression effect has acted as a real drag on the total return for investors. But I think it is normal for great big cyclical enterprises such as Aviva. I reckon the stock market is marking down the valuation just as profits rise because it’s trying to discount peak profits for the firm. Just as with earnings, the dividend and the share price plunged back in 2008. We could see a similar cyclical down-leg again, we just don’t know when, but we do know that it will be preceded by a period of high profits, otherwise it wouldn’t be a cycle.
With the turnaround behind us, I think Aviva is less attractive than it was before, despite the high dividend yield, the low valuation and City analysts’ predictions of earnings growth. rather than playing Russian Roulette with Aviva, I’d prefer to use the current stock market weakness to drip money into a FTSE 100 tracker fund, which would iron out single-company risk.
