We’re only a few weeks from full-year results on 9 March, and Aviva (LSE: AV.) shares are slipping. Does the market expect bad news? When investors are pessimistic, it can often be a great time for long-term investors to buy.
The Aviva share price is down 24% over the past 12 months. And though the FTSE 100 has been hitting new all-time highs in February, Aviva hasn’t followed the trend.
At Q3 time, Aviva spoke of “continued positive momentum in Q3 across our diversified business model,” and “strong capital and liquidity positions despite market volatility.”
On track
The value of new business in the group’s UK and Ireland Life division was up 46% from the same period in 2021. Everything looked to be going to plan, following the company’s slimming down and refocus.
Chief executive Amanda Blanc said: “We are on track to deliver our financial targets and trading momentum is building. Our dividend guidance remains unchanged and, as previously announced, we anticipate commencing additional returns of capital to shareholders with our 2022 full year results.”
Aviva intends to pay dividends of 31p per share for 2022, followed by 32.5p for 2023. On today’s share price, that would mean yields of 7% and 7.4% respectively. And the new dividend is progressive — only modestly, but still progressive. Cover by earnings might be a bit thin in the next couple of years, though.
Valuation
Forecasts suggest a price-to-earnings (P/E) ratio of under nine for 2023, dropping as low as 7.5 in 2024. With that kind of valuation, and the high prospective dividend yield, do Aviva shares look like a no-brainer buy now?
I think they might be, except for two main downsides. One is the risk to the financial sector as a whole, and to the insurance business specifically, in 2023. The UK economy might have avoided a technical recession in 2022, but only just. And we’re still heading for one this year. The Bank of England seems to think it won’t be as bad as feared. But it’s still not good news.
We’re also still at very early days in Aviva’s turnaround. I do like what I see so far, after the firm divested a load of non-core business and assets. Prior to that, the City had seen the company as bloated and slow-moving, at a time when the competition was looking lighter and more nimble.
Focus
But Aviva is now back to focusing on its core insurance markets in the UK, Ireland, and Canada. I see that as a positive, but it’s also a significant unknown.
I think investment cash going into financial and insurance stocks is likely to remain tight through 2023. And I suspect the big investors might feel more comfortable with others in the sector, which are a few years ahead of Aviva in their global planning.
Still, despite the risks facing Aviva specifically, and the insurance sector generally, I rate Aviva as a long-term buy for investors who can handle some ups and downs.
