The Aviva (LSE: AV.) share price has been through a few false starts, but it’s still down 40% in the past five years.
Set to climb?
I see increasing signs that the shares might not stay this cheap much longer. One is that finance sector dividends are on the up.
According to investing services firm AJ Bell, financial stocks could generate more than 50% of all FTSE 100 profit growth this year.
The lion’s share of that should come from banks. Analysts expect them to pay out more in dividends than in 2007.
That was the year before the big bank crisis, so it could be a key milestone. And insurance firms tend to follow where banks lead. So I see a good chance of the mood turning bullish towards finance stocks in the second half of 2023.
Insurance yields
Forecast dividend yields on insurance stocks are already high right now. And the City thinks they should be well covered by earnings. Aviva itself looks set to deliver 7.8%, and others offer even more.
The predicted dividend at Legal & General stands at 8.4%. And Phoenix Group Holdings tops the sector with an expected yield of a whopping 9.5%.
Why are share prices low enough to push these yields up so high? Much of it is surely down to the economy right now.
Many investors, especially the big firms, will expect further woes in the finance sector this year. And with inflation still so high, I fear they might be right. But I can’t see it as any more than a short-term thing.
Valuations
Insurance valuations are tricky. Forecast price-to-earnings (P/E) ratios look good. But insurers are typically coming off a bad year in 2022.
Aviva recorded a statutory loss last year, as did a number of others in the sector. And a lot of folk will want to see the return of profits before they’ll stump up their investment cash.
Forecasts put it on a P/E of 7.5 for this year, which is very low. If we see signs of earnings forecasts being met, that could give share prices in the sector a boost.
For Aviva, the real test could come with first-half results, due on 16 August. So that date is firmly down in my calendar.
It should give us some idea of its dividend confidence, for one thing. If the interim dividend looks good, and the firm is upbeat about its full-year cash prospects again, I think sentiment might improve.
Cyclical business
Overall, the insurance business is often a cyclical one. A strong worldwide economy makes insurance stocks look relatively safe, and investors bullish. Ironically, many will buy in when the business is in the upwards part of the cycle.
I’d never suggest trying to time the cycle. Instead, I’d prefer to keep buying shares through the ups and downs. That way, I’d get more for the same money when things look bleak and share prices are low.
And that should boost my gains when we get back to a bull market.
