It’s not been a good start to the year for UK insurer Aviva (LSE: AV). The Aviva share price is down by more than 30% and the dividend has been cancelled. Should you give up and sell? I don’t think so.
Aviva may have a growth problem but the company looked cheap to me before this year’s crash. I still think it’s cheap, as the impact of Covid-19 on claims appears to have been limited so far.
The arrival of new boss Amanda Blanc may be the catalyst needed to bring some focus and direction to the group’s strategy. Blanc has promised to consider all the options “at pace”. Here are three reasons why I’m staying invested.
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1. Not business as usual
Blanc only took charge of Aviva at the start of July when former CEO Maurice Tulloch stepped down unexpectedly for family health reasons. However, Aviva’s new boss is an experienced insurance exec who has been on Aviva’s board as a non-executive director since the start of 2020.
In comments to press following her appointment, she said was not “a business as usual person” and planned to address the group’s underperformance.
Although we’ve heard this before, my feeling is that this time will be different. Tulloch’s strategy for the firm was seen as relatively conservative, which disappointed some investors. I’m pretty sure Blanc will be planning something more decisive.
2. Reboot could boost Aviva share price
Aviva isn’t a bad business. The group generated a return-on-equity of 14% last year and paid a £1.2bn dividend that was comfortably covered by surplus cash. However, I think Aviva’s share price is being held back by two problems.
One concern is that the business hasn’t delivered consistent growth in recent years.
The second is that Aviva’s strategy isn’t clear. The group owns businesses in Europe and Asia, as well as the UK. In the UK, it offers life insurance, general insurance (e.g., motor and travel) and investment and retirement products.
Most big insurers have moved away from such diverse activities. Instead, they’re focusing on their core markets. For Aviva, I think it might make sense to focus on the UK, where it has a strong brand and big market share.
Another option would be to separate the group’s life insurance business, which doesn’t have much in common with its general insurance operations.
3. An 11% dividend yield?
I remain convinced that the Aviva share price is far too cheap. Although profits are expected to fall this year as a result of the pandemic, the group’s stock is valued at less than six times forecast earnings. A lot of bad news is already in the price, in my view. Any improvement could spark a share price rally.
If the dividend returns at the level paid in 2019, the shares would yield 11%. Although I think this is unlikely, I do believe that Aviva will remain a top pick for high-yield investors. My money would be on a payout of around 20p per share next year. This would give a dividend yield of 7% at current levels.
In my view, this is a classic contrarian buy. The near-term outlook is uncertain but the value on offer looks good to me.
