Aviva’s (LSE: AV) share price has lost around 6% in value from its 12-month 2 April traded high of £4.99.
This aligned with the FTSE 100’s decline from 8,000 around that point, prompted I think by profit-taking from short-term investors.
Is it a bargain now?
Based on key stock value measures, Aviva was a bargain even before the recent price drop, but more so now.
On the key price-to-earnings (P/E) valuation measurement, it currently trades at just 12. This is the second lowest in its peer group, the average P/E of which is 19.8. So on this basis, it’s demonstrably cheap.
But how cheap exactly? To ascertain this, I used a discounted cash flow analysis using other analysts’ financial projections as well as my own.
The results show Aviva shares to be around 39% undervalued at their present price of £4.69. This means a fair value for the stock is about £7.69.
This doesn’t guarantee it will ever reach that point, but it underlines to me that it looks a bargain.
Growing business?
Earnings and profits power shareholder returns from a share’s price and dividends over the long term.
If these key drivers decline over time, then both a share’s price and dividend are likely to fall. Conversely, they are both likely to rise if earnings and profits grow consistently over the years.
There are risks in Aviva, as in all stocks, of course. One is another global financial crisis. Another is a resurgence in inflation in its key markets of the UK, US, and Canada, increasing the cost of living again. This could deter new customers from taking policies and cause existing ones to cancel theirs.
However, consensus analysts’ expectations are that earnings will rise by 7.8% a year to the end of 2026. Earnings per share are forecast to grow by 7% a year to that point. And return on equity is projected to be 14.6% by end-2026.
These figures look well-founded to me. Its 2023 results showed a 9% rise in operating profits to £1.47bn, from £1.35bn in 2022.
Solvency II operating capital generation increased by 8% — to £1.46bn, from £1.35bn in 2022. This is not only a safeguard against future financial crises but can also be a powerful engine for growth.
The 9 April £453m acquisition of AIG’s UK life insurance business looks positive for growth to me as well. AIG Life UK has a strong business in the small- and medium-sized enterprises insurance sector.
So does the 4 March £242m purchase of Lloyd’s of London firm Probitas. This has a major presence in the lucrative commercial insurance market.
High dividends?
Aviva increased its 2023 dividend by 8% to 33.4p a share from 31p in 2022. On the current share price of £4.69, this gives a yield of 7.1%.
This compares well to the average FTSE 100 yield of 3.8%. It’s also above my minimum requirement for a stock in my high-yield portfolio.
I bought Aviva at a lower price a while back, so I am happy with that position. If I didn’t have that, I’d buy it today for its good yield and strong growth prospects at what I consider a bargain price now.
