The Aviva (LSE:AV) share price has fallen significantly since hitting 470p in early summer. This is despite the FTSE 100 insurance giant delivering a robust first half, during which operating profit rose 8%.
So is there a catch, or are we looking at a deeply undervalued stock? Let’s take a look.
Performance
High inflation presents a significant challenge for insurers due to its potential to erode the value of their assets and disrupt the balance between premiums collected and claims paid out.
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Moreover, the increased cost of goods and services can drive up claims payments. This is particularly the case for long-term policies, leading to underestimation of liabilities and potential financial strain.
However, performance to date in 2023 has been robust. In addition to rising operation profits, the company’s Solvency II own funds generation jumped 26% to £648m. Meanwhile, gross written premiums in general insurance rose 12%, reaching £5.27bn.
The firm also noted that it was on track to deliver its target of £1.5bn per annum for Solvency II operating own funds generation by 2024. This would be complemented by £750m of cost reductions.
Aviva said it now anticipates a dividend payment of around 33.4p for 2023. That marks a modest increase from 31p in 2022.
However, this wasn’t enough to push the share price upwards.
Valuation
Like many UK-listed stocks, Aviva’s long-term performance hasn’t been particularly encouraging, with its stock witnessing a decline of 17.3% over the past five years.
Analysts’ consensus projections paint a more optimistic future for Aviva, with anticipated earnings per share (EPS) of 52.5p in 2023, projected to rise to 61.1p in 2024 and further to 67.3p in 2025. These estimations translate to a forward price-to-earnings (P/E) ratio of 7.6, a valuation that’s almost half the FTSE 100’s average.
These forecasts imply that Aviva shares are positioned for substantial growth in the medium term, suggesting potential upside for investors willing to consider the stock’s fundamental strengths and growth prospects.
Pros vs cons
Insurers are often considered cyclical stocks, driven by economic and market factors that influence their business operations and financial performance. During downward cycles, demand for their services fall, as does, in most cases, their investment assets.
So in the current environment, challenges persist. Among other things, inflation triggers an increase in the costs of various goods and services, encompassing medical expenses, vehicle repairs, legal fees, and more.
Conversely, an improving macroeconomic backdrop and some signs that inflation is moderating, will likely be positive for business. In this risk-off market, investors may be looking for macroeconomic signals over earnings to provide direction.
So is this an unmissable buying opportunity? Well, from a valuation perspective, there’s plenty of potential. The average 12-month price prediction for Aviva is 533.67p, a 42% increase from the current value. The stock also offers a very attractive 8.5% dividend yield.
One of the strongest on the index. It’s certainly an attractive investment proposition.
