With a forecast dividend yield of 6.8%, the Aviva (LSE: OFF.) share price caught my eye, hinting that it might be undervalued.
I have a personal bias toward Aviva, having invested in it a few years back, weathering the storm through recent tumultuous times. Despite only slightly surpassing my initially paid price, a modestly bullish 12% rise in the share price in 2024 ignites my optimism for potential future growth.
Hidden within Aviva’s recovery lies a promising story. Despite the insurance sector’s turbulent environment in recent years, sentiments surrounding Aviva and similar stocks have waned due to inflation and high interest rates. Nonetheless, beneath the surface, Aviva has been well on its way towards a significant turnaround even if the share price may not reflect this transformation.
Reflecting on the FY results, CEO Amanda Blanc highlighted Aviva’s substantial progress in 2023 with increased sales, reduced costs, and a 9% rise in operating profit. Coupling this with Aviva’s position as the UK’s leading diversified insurer, including strong footing in Canada and Ireland, the company’s future prospects are promising.
Moving into 2024, a Q1 update in May echoed optimism with a 16% uptick in general insurance premiums and a 15% increase in wealth management business. Aviva anticipates achieving an operating profit of £2bn by 2026, marking a notable 36% rise from the previous year’s £1.47m. Although projecting a hypothetical share price of 665p based on these figures, practicality may temper these expectations given the cyclical nature of the industry.
Navigating the cyclical risks inherent in the industry presents challenges. Despite a forward P/E of 11 for the current year – somewhat steep compared to the FTSE 100 average – a shift towards a multiple of around nine on 2026 forecasts may yield a more balanced valuation. However, concerns about economic stability and fluctuating insurance dynamics raise questions about the security of this valuation.
Hinging on H1 results set for release on August 14, a potential upswing in share price looms on the horizon. With the possibility of Aviva breaching the 500p threshold by the end of 2024, investors may find themselves at a pivotal juncture. Nevertheless, speculation must be balanced with diligent research before forging ahead into the uncertain waters of the stock market.
