Past performance is not necessarily a guide to what will happen in future, in the stock market as elsewhere. But learning how a business has been performing can provide useful information when assessing its current prospects.
Take Aviva (LSE: AV) as an example. By looking back at the drivers for the Aviva share price in the past few months, I think I could make a more informed decision on whether to add the insurer to my portfolio now.
Modest gain
Over the past year, the Aviva share price has moved up but only by 2%.
Still, that is better than the performance during that period of the benchmark FTSE 100 index of which Aviva is a constituent. It moved down 3%.
That sort of price movement reflects the ‘steady as she goes’ nature of the insurance business, arguably. A mainstream insurance business might be expected to perform broadly in line with the economy.
But in fact that is an oversimplification. Fellow FTSE 100 insurer Admiral has gained 16% over the past year, for example. When investing, one needs to pay attention not only to the sector but also the specific company.
Last year, Aviva reported a loss. However, shifting asset prices make it hard to value insurance shares purely on the basis of earnings. The current share price means Aviva has a market capitalisation of £12.4bn. Compared to an operating profit of £0.7bn in the first half of its current financial year, that looks cheap to me.
Where things go from here
The Aviva of today is a different beast to a few years ago.
During that period, it sold off non-core businesses to focus on its main markets, notably the UK.
Has that put it in a better or worse position from an investment perspective?
The concentration on fewer markets has added some risk. If the UK insurance market runs into challenges – for example regulatory pressure to lower premium rates – that could be worse news for the Aviva share price than if the firm had a wider spread of business.
Overall, though, I think focussing on key markets with critical mass where the business has some right to win is a smart move. It means management can focus its attention where it can be most useful.
Aviva has a large customer base, strong brands, and understands the insurance business well. I see those as strong assets that set it up well for profitability over the long run.
The dividend yield of 7% is also attractive to me. I see prospects for ongoing growth in the shareholder payout. The interim dividend grew a healthy 8%. If business continues to go well, I reckon there is further scope for dividend increases over the next few years.
At the current Aviva share price, if I had spare cash to invest in March, I would be happy to add the company to my ISA.
