Today we’re taking a look at UK insurance and FTSE heavyweight AVIVA and reveal why we have added this stock to the cheapskate portfolio in 2021 and expect to add more. We’re going to cover why its so cheap right now, where we think the price is heading and what we think the future holds.
As always, the following is not financial advice, read our disclaimer
It’s no secret that the Aviva share price has taken an absolute hammering over the past few years and 2020 did not help the situation. Pre-2020, Aviva had become a pretty lacklustre company, where management were happy to chug along, paying the same old dividend, while competitors like Prudential experienced decent growth and earnings. This didn’t sit well with investors and the share price saw a steady decline from its high of 550p per share through 2018 and 19. Despite that, Aviva came into 2020 at a price per share of just over 420p.
And then Covid hit. The price plummeted (as did most stocks) to 210p, almost halving it’s share price. Being an insurance provider, it didn’t see an instant rebound like some companies and stayed around the same level for a few months….
Since then, the share price has recovered over 50% and is trading at time of writing at 335p. Part of the reason for this is new CEO – Amanda Blanc
In July, Amanda Blanc was appointed CEO of Aviva. Her appointment is pretty big news for the firm and in the first few months has implemented a much needed shakeup, raising £1.6bn from the sale of a majority stake in Aviva Singapore which will help with the companies finances, as well as streamlining the companies operations, focusing on the companies core operations .
Not only that, but early on, Blanc invested a cool £1m into the company, which is seen as a massive backing for the share price. We’re happy to see Blanc back herself.
Although the price has recovered somewhat, we still think the price is low enough right now.
So it’s low, but is it cheap?
Just because the price is low, doesn’t mean a stock is cheap. As well as a strong start from the new CEO, let’s look at some of the other reasons we think Aviva is cheap:
Most investors know Aviva as a solid dividend payer. Despite the uncertain news around it’s dividend, Aviva is expected to pay a final dividend for 2020 in March of 14p, bringing its total dividend to 21p, making its dividend yield for the year 6.26%. This is pretty respectable considering the rocky year the firm has had. With that in mind, and the low price, we think there will unlikely be a better time in the near future to pick up a FTSE dividend payer at this yield for such a low price again. It’s rare to find good dividend payers at rock bottom prices and while we wouldn’t say Aviva is quite rock bottom, we feel it’s definitely lower than it should be.
“The best thing that happens to us is when a great company gets into temporary trouble. We want to buy them when they’re on the operating table.”– Warren Buffett
Low P/E ratio
At time of writing, Aviva shares are trading with a price earnings ratio of around 7 (click here for our explanation on P/E ratios). For a company with such a good dividend yield for the year, a commitment to increasing the dividend yield over the medium terms and a bright outlook, we think the stock is majorly undervalued at 7. We love value stocks and a company trading with a ratio in the single digits always piques our interest.
With the good news, upward momentum, good dividend yield and low P/E ratio, coupled with a price that’s still 30% down from pre-pandemic prices, we think there’s definitely some room for capital gain in addition to the decent dividend. For us, this makes the stock even more attractive and is a welcome bonus. IT fits neatly into our strategy of buying good companies and holding for the long term – we would expect Aviva to perform reasonably well in terms of growth in the short term as the world comes out of pandemic restrictions and the new company focus takes hold, while in the medium to long term we would hope to see steady and strong dividend yield, which will have been boosted by buying the shares today at low price
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