Under £4 but yielding 7.8%, is the Aviva share price a bargain?

The Aviva (LSE: AV) share price is currently below £4, losing 15% in value from its 9 March high. Much of this drop resulted from the general sell-off in UK financial stocks that began in mid-Q1, in my view.

This followed renewed fears of a new financial crisis, sparked by the failures of Silicon Valley Bank and Credit Suisse.

These concerns looked unwarranted to me. After the Great Financial Crisis that began in 2007, the UK’s financial system was dramatically strengthened. But many of its financial stocks — Aviva included — remain at prices much lower than before the sell-off.

The onset of a genuine major financial crisis does remain a risk for such shares, of course. Another is that inflation and interest rates remain high, acting as a deterrent to new-client business.

Growing core business

Since Amanda Blanc took over as CEO in 2020, she has focused on divesting non-core businesses and re-energising core ones.

Eight such businesses have been sold off since then, raising around £7.5bn. At the same time, its insurance, wealth, and retirement businesses have grown in the UK, Ireland, and Canada.

In its H1 results released on 16 August, the company said it expects operating profit to increase by 5%-7% this year.

It also maintains a strong Solvency II shareholder cover ratio of 202%. This compares to just the 100% that meets the statutory requirements for UK insurance companies.

A testament to how well Blanc has reorganised the company came from hedge fund manager Cevian after its 2022 results.

When it took a 5% stake in Aviva in 2021 it said it had been “poorly managed” for years. Only one year later, it said Blanc had done an “excellent job in restructuring the company”.

Undervalued to peers

The company looks significantly undervalued to its peers on the key metric of the price-to-book ratio (P/B).

It currently trades at the lowest P/B of its entire peer group – at just 1.2. Phoenix Group Holdings trades at 1.4, Prudential at 1.7, Legal & General at 2.4, and Admiral at 7.8.

This gives a peer group average of 3.3.

Big passive income payer

In 2022, Aviva paid an interim dividend of 10.3p per share, with a total payout of 31p. Based on the current share price of £3.96, this gives a yield of 7.8%.

However, this year’s interim dividend was increased by nearly 8% (to 11.1p). If this was applied to the total payout, the dividend would be 33.418p, giving a yield of 8.4%.

Analysts’ forecasts are for similar rises in 2024 and 2025, giving respective yields of around 9.5% and 9.9%. These would put Aviva back into the elite group of FTSE 100 companies that provide a 9%+ return.

Even at the current 7.8% though, a £10,000 investment would make an additional £780 in passive income over a year. Of course, Aviva could see share price rises or falls that boost or dent that figure, plus investors might have to pay tax on their gains.

I already hold the stock but if I did not I would happily buy it today. I think its P/B should converge to those of its peers over time, although precisely when is impossible to predict. In the meantime, I will benefit from high passive income payments.


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