CHEAP STOCK #2
Aviva (AV.) 514p
After a difficult few years in the wake of the financial crisis, chief executive Mark Wilson has helped steady the ship at this large insurance business.
Summarising last year’s results Wilson said: ‘Aviva’s results are simple and clear cut: more operating profit, more capital, more cash, more dividend. And there is more to come.’
Wilson took over as CEO in January 2013 and has since divested an interest in Dutch insurer Delta Lloyd, exited markets such as France, Russia, the US and Malaysia and acquired Friends Life in a £5.6bn deal.
The aim has been to build a more streamlined operation which can generate plenty of cash with a focus on offering UK customers a one-stop shop for all their insurance needs (including life, accident and health) alongside asset management. Wilson appears to have gone a long way to achieving this goal.
A shift to managing insurance and savings online could help the company in its efforts to crosssell products across its customer base going forward.
The company’s presence in our value screen suggests the market is not giving full credit for Aviva’s transformation despite a reasonably strong run for the shares.
Given the strategy of narrowing the focus on the UK, we admit the fate of Brexit negotiations is a potential risk facing the business.
However, the fact that ratings agency Moody’s recently upgraded Aviva’s credit rating is very important. It noted the company had £11.4bn of surplus capital at the end of June based on European Solvency II rules governing how much cash insurers need to hold against the risk of financial shocks.
This surplus capital can be used for shareholder returns, to buy back shares for acquisitions and to re-invest in the business, potentially boosting organic growth.
Investment bank UBS has a ‘buy’ recommendation and 580p price target. It comments: ‘While the transformation strategy is in progress, we believe Aviva can be a sector leading risk-adjusted dividend and capital return story under Solvency II.’ (TS)