The Aviva (LSE: AV) share price is still trading over £4, having been lifted by takeover speculation.
Having worked in global financial markets for many years, I have found such rumours usually groundless. If any genuine takeover move had been made, Aviva would have been legally obliged to tell shareholders, which has not happened.
This aside, I already have holdings in the company, for three very good reasons, in my view.
Streamlined and refocused
The first is that since she took over as CEO in 2020, Amanda Blanc has brilliantly streamlined and refocused the company. So brilliantly, in fact, that her efforts have been praised by the notoriously difficult-to-please hedge fund manager Cevian.
After Aviva’s 2022 results, Cevian – a minority shareholder — said Blanc had done an “excellent job in restructuring the company”.
Indeed, from 2020 she oversaw the sale of eight non-core businesses, raising around £7.5bn. She also refocused the business on increasing wealth fund flows from the UK, Ireland, and Canada.
2022 operating profit rose 35%, despite difficult financial market conditions. And in its Q1 2023 update, it said it is also on track to beat its own funds generation target of £1.5bn a year by the end of 2024.
A risk remains, of course, that high inflation and interest rates reduce client business.
Undervalued to peers
The second reason is that Aviva still looks undervalued compared to its peers.
Despite the recent rise in its shares, it currently trades at a price-to-book ratio (P/B) of just 1.2. Phoenix Group Holdings trades at 1.4, Prudential at 1.8, Legal & General at 2.6, and Admiral at 7.7. The peer group average is 3.4.
This difference does not necessarily mean that Aviva’s P/B will completely converge to those of its peers. However, it does suggest to me that there is a fundamental technical reason for its shares to rise over time.
Huge passive income potential
The third reason is its huge passive income potential. In 2022, it paid an interim dividend of 10.3p per share, with a total payout of 31p. Based on the current share price of £4.09, this gives a yield of 7.6%.
However, the interim dividend this year increased by 8% (to 11.1p). If this was applied to the total payout, the dividend would be 33.48p, giving a yield of 8.2%.
Analysts’ forecasts are for similar rises to occur in 2024 and 2025, giving respective yields of 9.3% and 9.8%. These would put Aviva back into the elite group of companies that provide a 9%+ return.
Even at the current 7.6% though, a £10,000 investment would make an additional £760 over a year.
In 10 years, if the rate stayed the same, another £7,600 would be added to the initial £10,000. This is over and above share price gains or losses and tax obligations incurred, of course.
I already hold shares in the company, with an average price of £3.80. As a long-term investor now, 30p or so more is not a big deal on a £4 or so stock. However, the recent rise was driven by dubious rumours, in my view, and is therefore likely just a blip.
Consequently, if I were looking to establish a new holding, I would wait until the effect of the rumours on the shares fully wore off before thinking about buying.
