Down 10% this year, the Aviva share price looks like a FTSE 100 bargain

A non-core business divestment, a new pensions deal and one of the strongest rates of return in its sector make the Aviva share price look a bargain to me.

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Two key factors weighed on the Aviva (LSE: AV) share price in recent years, I feel. One has been legacy assets remaining on the books long after they have ceased to perform. The other has been a lack of focus on what the main drivers of the business will be.

Yet since Amanda Blanc took over as CEO in 2020, I think both negative factors have been addressed. So Aviva’s share price dropping 10% this year means it looks like a bargain to me.

New non-core asset divestment

Within the last week, Aviva Investors (the firm’s global asset management business) sold Central 12 shopping park near Southport. The price was around £27m, but more important, I feel, is that it signifies Aviva’s commitment to offloading non-core assets.

Since Blanc took over. Eight such non-core operations businesses have been sold in Singapore, Italy, France, Poland, and Turkey. Around £7.5bn has been raised to date through these sales.

The sale also hints that Aviva is hedging its bets on any imminent recovery in the retail and office sectors. This seems wise, given uncertainties over the short-term prospects of both in the UK.

Business focus re-established

Some of the sales occurred after activist hedge fund manager Cevian took a 5% stake in Aviva in 2021. At that time, the fund manager said that the firm had been “poorly managed” for years. But following the 2022 results, Cevian said that Blanc had done an “excellent job in restructuring the company”.

Aviva’s focus has been on increasing wealth fund flows in the UK, Ireland, and Canada general insurance businesses.

In 2022, its life insurance new business increased by 15% in value from 2021 and general insurance sales went up 8%. Operating profit was up 35%, despite difficult financial market conditions following Russia’s invasion of Ukraine.

Additionally, it has targeted the lucrative pension transfer market as an area for growth. This involves a specialist such as the company taking over another firm’s defined benefit pension schemes.

On 5 May, it announced a £900m bulk annuity buy-in for the Thomas Cook Pension Plan. In February, it completed an £850m pension scheme deal for failed retailer Arcadia Group. In 2022, it made 50 such bulk annuity deals worth £4bn. Overall, Aviva expects to finalise between £15bn and £20bn worth of these deals by 2024.

Stellar shareholder returns

In 2022, the shares had a dividend yield of 7%. In 2021 it was 3.1%, and in 2020 it was 8.3%.

An additional return to shareholders in 2022 was through a £300m share buyback. This took the total capital return to shareholders to over £5bn since 2021. Overall, it means that Aviva offers one of the strongest rates of return in its sector, at around 10%.

The key risk for me in the share price is that inflation remains high in the UK and its other core markets. Higher inflation means it will pay out more in insurance claims.

That said, I think inflation is at or near its peak in its core markets. I also think its pensions business will offset some, or all, of any slide in its insurance business.

I already hold positions in Aviva. If I did not, then I would buy the shares now for their likely dividend and share price gains.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Simon Watkins has positions in Aviva Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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