Like many FTSE financial stocks at the time, shares in Aviva (LSE: AV) tumbled around March last year.
This followed the failures of Silicon Valley Bank and then Credit Suisse, which stoked fears of another financial crisis.
The crisis never materialised, but several of these financial stocks are still marked down.
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Insurer and investment firm Aviva is around 9% lower than its 9 March 12-month traded high of £4.67.
Very recently I was considering replacing the company in my high-yield portfolio for a higher-yielding stock.
However, a fresh analysis of its undervaluation against its peers, and strong business prospects convinced me not to do so.
Undervalued against its peers
Despite recovering better than several other financial stocks after March’s mini-crisis, Aviva still looks very undervalued to me.
On the key price-to-book (P/B) ratio, Aviva is currently trading at 1.3 against a peer group average of 3.5.
This bunch comprises Phoenix Group Holdings at 1.5, Prudential at 1.7, Legal & General at 2.9, and Admiral at 8.
A discounted cash flow analysis shows Aviva shares to be around 48% undervalued at their present price of £4.24. Therefore, a fair value would be about £8.15.
This does not necessarily mean that they will ever reach that level. But it does underline to me that the shares are very good value indeed.
Business strength
Analysts’ expectations are that Aviva’s earnings from now to the end of 2026 will rise by around 29% a year to the end of 2026. Revenues are expected to increase by about 12% a year to the same point.
This should push earnings per share (EPS) to grow by 29% a year to end-2026, according to the forecasts. Return on equity is expected to be nearly 14% by that date.
Its H1 2023 results give me considerable optimism that the numbers can be achieved.
Operating profits increased by 8% to £715m (from £661m in H1 2022). The company now expects its operating profit for FY23 to rise by 5%-7%.
Gross written premiums from its General Insurance business rose 12% in H1 to £5.3bn (up from £4.6bn). And new business value from its Insurance, Wealth & Retirement segment increased 7% to £319m (from £297m).
A key risk in the stock is that inflation in Aviva’s core markets of the UK, US, and Canada remains high.
This would prevent interest rates from falling as expected and keep the cost of living high. In these circumstances, existing clients may cancel policies and new customers may be deterred.
Another risk would be a genuine new financial crisis, of course.
Dividend prospects
In 2022, Aviva paid 31p a share in dividends, giving a 7.3% yield based on the current £4.24 share price.
However, 2023’s first interim dividend of 11.1p was a 7.8% increase from last year’s 10.3p. If that was applied to the final payment, then the total payout would be 33.418p. This would yield 7.9%, based on the current share price.
Both compare very favourably to the current average FTSE 100 yield of 3.8%.
In sum then, the continued good yield, strong business prospects, and apparent share undervaluation led me to keep the stock.
In fact, if I did not already own it, I would buy it right now.
