The Aviva (LSE: AV) share price has gone nowhere in a year. In fact, looking further back, you could say it’s gone nowhere in over four years, as the shares were trading above £5 back in early 2014. Yet in this time, the group has demonstrated that it’s transformed itself into a leaner, stronger outfit, paid off debt, and boosted its dividend significantly. Furthermore, in its most recent half-year results in August, the company said it had confidence in delivering its target of “greater than 5% operating earnings per share growth in 2018.”
So why is the stock out of favour right now, and is the current share price a bargain?
Out of favour
In answer to the first question, there are most likely several reasons that Aviva shares have been unpopular recently.
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At a broader level, ‘value’ stocks are very much unloved at present. For years now, investors have been chasing ‘growth’ and neglecting value stocks. How long this trend will persist for is hard to call, but it certainly goes some way towards explaining Aviva’s lack of share price momentum.
Of course, Brexit uncertainty probably isn’t helping sentiment either. Like value stocks, UK stocks are also out of favour. While Aviva does operate internationally, it also has a strong domestic focus, meaning that many global investors are probably not interested in the stock at present.
Then there’s sector-wide issues. As my colleague Alan Oscroft mentioned recently, investors are concerned that possible legislation from the Prudential Regulation Authority (PRA) could be set to hit the sale of lifetime mortgages, and that this could force Aviva to boost its balance sheet. This kind of uncertainty is never good for a company’s share price.
Lastly, looking at company-specific issues, I think Aviva still has a way to go in terms of enhancing its reputation and rebuilding trust after the problems it’s had in the past. At the moment, the company just simply isn’t viewed in the same light as Prudential or even Legal & General.
Looking past these issues, do the shares offer value right now?
Low valuation metrics
Personally, I believe Aviva shares are cheap at current levels. Here’s why.
For starters, Aviva’s P/E ratio just looks too low, in my opinion. With City analysts expecting earnings of 57.7p per share this year, the forward-looking P/E is just 8.6. In contrast, Prudential trades on 12.1, Legal & General Group on 9.0, and the median FTSE 100 forward P/E is 13.4. So, on a relative basis, Aviva potentially offers value. Furthermore, the company has been buying back its own shares this year, which suggests management thinks the share price offers value at present as well.
Then there’s the big dividend yield. Aviva has recorded four consecutive dividend increases now and looks set for another healthy increase of around 10% this year. With the insurer expected to pay out 30.1p per share for FY2018, the prospective yield is 6.1%. When you consider that the median FTSE 100 forward-looking dividend yield is 3.6%, Aviva’s high yield suggests the stock is undervalued.
Of course, there’s no guarantee that Aviva’s share price will rise anytime soon. However, for patient long-term investors, I believe the current share price offers value.
