Plenty of companies in the FTSE 100 look unloved right now, with Aviva (LSE: AV) up there as one of the most hated. Year-to-date shares in this financial services giant have collapsed by nearly 25%, excluding dividends, underperforming the FTSE 100 by around 14%.
Following this decline, Aviva’s dividend yield has spiked to 8.7%, putting the company in the top 10 highest yielding stocks in the FTSE 100 (it’s number eight). If you have some money to invest, I think it’s worth taking advantage of the opportunity. Here’s why.
Oversold
Before I get into what I like about Aviva, I want to take a look at the reasons behind the stock’s decline over the past few weeks.
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It seems as if there are three main reasons why investors have deserted the firm. Firstly, Brexit uncertainty, which is weighing on all FTSE stocks not just Aviva’s, and the company can’t do much about this.
Second, CEO Mark Wilson, who has steered the business since 2013, recently announced that he’s stepping down. Analysts were somewhat surprised by this announcement as Wilson has done a fantastic job of turning Aviva around and re-building the business after the financial crisis.
And lastly, Aviva has been hit by Government plans to tighten regulation of the equity release lifetime mortgages (LTM) market, in which Aviva is the largest player.
On this last point, a few days ago the Prudential Regulation Authority (PRA) published more information on the proposed changes for LTM providers. The guidance was less demanding than first feared, which is good news for Aviva.
Management changes
So, changes to LTM regulation might not be as bad as feared, and the company can’t do much about Brexit, but should we be worried about Wilson’s departure?
I think his decision to step down is a signal to the market he believes his job is done. Aviva is in a much better position than when he took over.
The company has plenty of excess capital, which it’s using to pay down expensive debt, buy back shares, and is planning to spend some of these funds on acquisitions to help reinforce its position in the insurance market. Put simply, I don’t think Wilson’s decision to step down is a red flag for investors.
Time to buy?
After considering all of the above, I’m of the decision that shares in Aviva are a good deal today. Not only does the stock support a dividend yield of 8.7%, but it’s also changing hands at a highly attractive valuation of just 6.7 times forward earnings.
In my view, this multiple is too cheap to pass up. The rest of the insurance industry is trading at an average P/E of 10, indicating that Aviva is undervalued by around 49%. This potential for capital gains, plus the dividend yield of 8.7%, leads me to conclude that Aviva could be a great addition to any portfolio.
