The Aviva (LSE: AV) share price has done well over the last 12 months. It has risen by 50%. That’s a little more than Legal & General, which is a broadly comparable FTSE 100 company. Aviva’s shares have done particularly well so far this year. However, over five years Aviva’s share price is down 10%, meaning investors have had to rely on its dividends to generate a return.
Becoming slimmer
I’m a little surprised that Aviva has only slightly outperformed Legal & General over the last year, given that praise and attention given to the former’s slimming down. It has made eight disposals in eight months, with the latest being a sale of its business in Poland. Most of the disposals have been in Europe and Asia.
That divestment brings total cash proceeds from chief executive Amanda Blanc’s strategy to £7.5bn. To put that into context, that’s just less than the entire market value of the group when the shares traded at their steepest discount to book value last year. That’s one indicator that investors could expect to see some investment in future growth alongside either special dividends or possibly share buybacks.
The company has already indicated that the cash is likely to be returned to shareholders and also used to reduce debt. It has announced previously it wants to cut debt by £1.7bn in the first half of the year.
What could it all mean for the Aviva share price?
Given that shareholders wanted Aviva to become leaner and there has been a merry-go-round of managers leading the firm, perhaps this turnaround can be a springboard for a brighter future. Such a future could lead to bigger returns for shareholders.
But I have some concerns, including whether a slimmed down business can improve the Aviva share price over time as it means revenues will be lower. Also, Aviva has an inconsistent record when it comes to dividends, unlike Legal & General. And as an insurer plus pension and savings company, it is very tied to the economy and stock market. If either worsens, Aviva’s shares are likely to fall.
Much of the future success of the Aviva share price depends on its focus on the UK, Irish and Canadian markets leading to a more efficient, higher-margin business.
Looking back on the plus side, the shares do appear to be cheap, which I find reassuring. It would provide me with a margin of safety if I were to invest in Aviva shares. The shares trade on a P/E of just seven.
Time will tell if the new slimmed down business delivers better results. It feels in many ways like the hard work is just beginning. I hope the turnaround works for shareholders, but I won’t be adding the shares to my portfolio. I’m far from convinced at the moment that Aviva makes for a better investment than Legal & General, which I already hold.
