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Barring a sudden last-minute recovery, 2023 looks like being a pretty miserable year for Aviva‘s (LSE:AV.) share price. The FTSE 100 stock has lost 11% of its value since the start of January.
Aviva shares perked up early this month as talk of a potential takeover exploded. Potential interest from a suitor is perhaps unsurprising given its impressive streamlining drive of recent years.
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But the company is trending lower again as fears re-emerge over the state of the UK economy and how this could impact earnings.
Yet, I think, at 396.6p per share, the financial services giant could be too cheap to miss. Here are two reasons why I think the life insurance giant is trading below value.
1. Huge dividend yields
The possibility of massive dividends is why I bought Aviva shares for my portfolio.
Okay, dividend cover at the company is weak (at 1.2 times and 1.3 times for 2023 and 2024). But the company’s cash-rich balance sheet still puts it in good shape to meet current dividend forecasts, in my view.
So I’m tempted to increase my holdings based on the City’s payout estimates. For this year, the insurer’s dividend yield sits at 8.1%. This is far above the FTSE 100 forward average of 3.8%. And for 2024, the reading moves to an even-more impressive 8.6%.
And as the table below shows, the forward-looking yield for 2023 also beats those of the majority of Aviva’s rivals.
| Company | Forward dividend yield |
| AIG | 2.3% |
| Zurich Insurance Group | 6.2% |
| Aegon | 6.1% |
| Legal and General Group | 9.5% |
| Prudential | 1.9% |
2. Mega-low P/E ratios
Aviva shares also look ultra-cheap when considering its profits outlook for the next couple of years. Analysts expect the firm to flip back into profit this year with earnings of 38p per share. This leaves it trading on a price-to-earnings (P/E) ratio of 10.4 times.
This is below the prospective average of around 12 times for FTSE index shares. And what’s more, the company’s multiple topples to 8.6 times for 2024, reflecting broker expectations that earnings will rise 20% year on year.
As you can see below, the British company also trades on lower P/E ratios than most of those domestic and foreign rivals mentioned above.
| Company | Forward P/E Ratio |
| AIG | 9.3 times |
| Zurich Insurance Group | 12.6 times |
| Aegon | 7.2 times |
| Legal and General Group | 9.6 times |
| Prudential | 11 times |
The bottom line
On the one hand, Aviva doesn’t have the broad geographic footprint of its rivals. This in turn could limit its long-term profits growth, and especially in comparison with operators focused on emerging markets, like Prudential.
But I still believe earnings could soar from the firm’s UK, Irish, and Canadian markets. Populations are rapidly ageing in these Western countries, meaning demand for life insurance, pensions, and other protection and retirement products are likely to soar.
Aviva is also ahead of the pack when it comes to digitalising its operations, which — allied with its focus on capital-light businesses — could also help it deliver sector-beating earnings growth over the long term. At current prices I think Aviva is a brilliant bargain.
