I’ve been keeping a close eye on Aviva (LSE:AV.) shares in recent weeks as a takeover rumour took the stock higher, before rumours passed and the stock fell with the wider index.
Nonetheless, the insurer’s share price is down 2.4% over 12 months and up 5.7% over 24 months. As such, if I’d invested in the stock two years ago, today my investment would be worth £943.
That’s clearly not great, but Aviva does pay a sizeable dividend. In fact, over two years I’d have received around £150 in dividends.
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So, overall I’d have just short of £1,100 from my investment, giving me an annualised return of around 5%.
Risks
High inflation poses a significant challenge to insurance companies. That’s because it has the potential to devalue their assets and disrupt the balance between the premiums collected and the claims paid out. Thankfully, inflation appears to be on the way down, but a potential uptick still poses a risk.
Furthermore, the rising costs of goods and services can result in increased claims payments. This is especially true for long-term policies, which can lead to an underestimation of liabilities and potential financial strain. In turn, insurers have to continually reprice their services.
In a more specific risk to Aviva, it may also be the case that the stock pushes down in the coming weeks if there are no further rumours or news about a potential takeover.
Potential
The first thing that must be noted, given the above and the challenging macroeconomic environment, is that Aviva has been performing well.
Operating profits rose 8% in the first half on the year, and Solvency II own funds generation jumped 26% to £648m.
For the full year, analysts are now expecting earnings per share to come in at 29.3p. That’s up from a reported loss of 38.2p in 2022, but below the positive earnings of 50.1p in 2021. Going forward, analysts suggest 41.4p in 2024 and 47.1p in 2025.
These estimates are actually a considerable downgrade on where they’d been in the summer. As a result, we can see that Aviva is currently trading with a forward price-to-earnings ratio of 13.3 times. That’s not overly cheap.
Of course, analysts’ opinions vary. However, the stock has zero ‘sell’ ratings, with five analysts at ‘hold’, four at ‘outperform’ and six at ‘buy’.
While this broadly reflects the positive outlook brokers have on UK stocks in the long run — lots of them are undervalued — it’s also reassurance to see such a consensus.
Jefferies, for example, sees the stock surging on a more positive outlook in General Insurance. Moreover, the brokerage sees £5.3bn of capital returns between 2023 and 2026, equivalent to 55% of Aviva’s current market cap.
Adding to this, I can also see Aviva surging on positive macroeconomic trends — falling interest rates — and bulk purchase annuities. The stock continues to look appealing as the share price falls. I’m keeping a close eye on it.
