Aviva (LSE: AV) shares are down from their 29 August 12-month traded high of £5.08. This is despite a 6% rise from 14 November when it released a nine-month and Q3 trading update.
These looked very good to me. Nine-month General Insurance premiums increased 15% year on year to £9.1bn and Protection & Health sales rose 22% to £403m. Retirement business sales soared 67% to £7.3bn and net flows into its Wealth division jumped 21% to £7.7bn.
The firm has increased customer numbers by 1.2m to 19.6m since Amanda Blanc took over as CEO in 2020. It plans to boost its position as the UK’s leading diversified insurer by having 21m+ customers by 2026.
A principal risk to its plans is inflation edging back up in its key markets, I think. This would increase the cost of living, which could prompt existing customers to cancel their policies and deter new ones.
However, Aviva forecasts an operating profit of at least £2bn by 2026. In 2023, it was £1.467bn, which itself marked a 9% increase on 2022’s figure of £1.35bn.
How does the Direct Line acquisition look?
Although these results lifted Aviva’s share price, they did not propel it decisively through the key £5 marker. This has proven a difficult price level for the firm to convincingly hold above since the second half of 2018.
This is not only despite a series of good results since Blanc became CEO. It also follows the well-executed reorganisation of the business since then.
That involved selling off eight non-core businesses to raise around £7.5bn and re-energising core ones. To these were added strategically valuable acquisitions, including April’s purchase of AIG’s UK life insurance business.
Yet the in-principle agreement to buy rival insurer Direct Line looks beneficial to Aviva to me. If the deal goes through, it will give the combined entity more than 20% of the lucrative motor insurance market. It will also effectively remove a competitor and allow for efficiency savings at Aviva.
It remains to be seen whether, when finalised, it will push Aviva’s share price above £5 and keep it there.
Am I bothered?
I bought Aviva shares for the dividend income potential from their high yield for the long term.
As a stock’s yield moves in the opposite direction to its price, I am not worried if the price falls.
Moreover, analysts forecast that Aviva’s dividend will rise to 38.1p in 2025 and 40.9p in 2026. Based on the current £4.75 share price, these would generate respective yields of 8% and 8.6%.
I bought £5,000 of Aviva shares a while back and investors considering doing the same would make £5,048 in dividends after 10 years. This is based on the current average 7% yield and on the dividends being compounded.
Over 30 years on the same two provisos (which are in no way guaranteed), this would rise to £35,582. Adding in the original £5,000 investment would mean the Aviva holding by then could be worth £40,582. This would pay £2,841 a year in dividend income.
As for me, I am happy with the holding I have. But if I did not have it, I would buy the stock today for its strong growth prospects and its high yield.
