The Aviva (LSE: AV.) share price is staying stubbornly low. So what might shift it?
I can see a few things. But I reckon dividends, if they’re paid in line with forecasts for the next few years, could be just the thing to give it a helping hand.
Refocus
Aviva had been a bit of a disappointment for some years, and the main reason looked clear. The company was just too bloated and seemed to lack clear direction. That was at a time when competitors were slimming down and cutting costs.
But Aviva has been through the refocus it needed.
With FY 2023 results, CEO Amanda Blanc said: “We have made significant progress in 2023. Sales are up, costs are down, and operating profit is 9% higher. Our position as the UK’s leading diversified insurer, with major businesses in Canada and Ireland, is clearly delivering. Today we have raised our total dividend by 8% to 33.4 pence and have now returned more than £9bn in capital and dividends to shareholders over the last three years.”
That sounds like a good result. So why is the share price still lower than I first paid in 2015?
Pudding, proof
Well, sentiment’s weak, and pretty much everyone in the financial sector’s under quite some pressure.
To improve that sentiment, I think investors might need to see the proof of the pudding. And that might mean two or three years of earnings and dividend rises.
As it happens, that’s just what the analysts think will happen.
The following table shows how broker forecasts see the Aviva price-to-earnings (P/E) ratios and dividend yields (DY) could look like for the next three years.
| Year | 2024 | 2025 | 2026 |
| Forecast P/E | 10.8 | 9.5 | 8.9 |
| Forecast DY | 7.3% | 7.9% | 8.7% |
| Cover | 1.17x | 1.23x | 1.22x |
Valuation
Those will be nice rises in the dividend, if they come off. And the P/E would drop accordingly.
But what is a good P/E for a stock in the insurance sector? That’s not easy to answer. It can be a cyclical sector, with erratic earnings.
And that means these stocks are rarely in the top half of the Footsie in P/E terms. So for me, I pretty much wholly think in terms of the dividend for this sector.
And a yield of close to 9% by 2026 suggests a share price that’s too low.
Yield valuation
What about a 6% yield? I’d be happy with that as a long-term yield. And it would suggest a 2026 P/E of close to 13. That could push the share price up above 650p.
I can’t see it getting quite that high in three years, mind. And we still have a few uncertain years ahead of us. I reckon all of the financial sector could see shaky share prices for at least another year.
Still, I’m happy to just keep taking the dividends. So far, they’ve more than made up for the share price falls of the past nine years.
