For most shares in the FTSE 100, 2013 was a good year and investors have likely enjoyed capital gains and rising dividend income.
That makes me nervous about investing for 2014 and beyond, and I’m going to work hard to adhere to the first tenet of money management: preserve capital.
To help me avoid losses whilst pursuing gains, I’m examining companies from three important angles:
- Prospects;
- Risks;
- Valuation.
Today, I’m looking at life and general insurance company Aviva (LSE: AV) (NYSE: AV.US).
Track record
With the shares at 477p, Aviva’s market cap. is £14,048 million.
This table summarises the firm’s recent financial record:
| Year to December | 2008 | 2009 | 2010 | 2011 | 2012 |
|---|---|---|---|---|---|
| Revenue (£m) | 36,206 | 34,690 | 31,805 | 26,255 | 22,744 |
| Net cash from operations (£m) | 8,095 | 2,685 | 1,807 | (342) | 2,294 |
| Adjusted earnings per share | 62.9p | 45.1p | 37.6p | 11.1p | (15.2p) |
| Dividend per share | 33p | 24p | 25.5p | 26p | 19p |
1) Prospects
Aviva is aiming to achieve its turnaround by focusing on debt reduction and what it calls ‘cash flow plus growth’. In the first nine months of 2013 cash flow was flat against the year-ago figure at £1.3 billion. However, there’s a better result on growth with Value of New Business (VNB) improving 14% to £571 million over the period. That seems like good progress on business generation, although the headline figure amalgamates mixed trading across regions.
The firm’s main cash-generating areas, UK and France, increased VNB by 5% and 33% respectively. The growth markets of Poland, Turkey and Asia increased VNB by 44%, which is  significant because 22% of Aviva’s overall new insurance business came from those areas, up from 18% a year ago, suggesting where Aviva’s future success might come from. There were big falls in problem areas like Italy down 63% and Spain down 41%, both regions that have yet to turn.
Operating expenses were 7% lower than a year ago and the firm reckons that, compared to 2011, it is on course to achieve a £400 million on-going reduction to its cost base in 2014, which should feed into further debt reduction going forward.
Aviva’s CEO reckons the firm’s turnaround is still young and, despite progress during 2013, there remains much to do, but he is optimistic. If macro-economic conditions remain benign, as they seem to have become, I’m also optimistic that Aviva shareholders will see a steady total return on their investments during 2014 and beyond.
2) Risks
In common with other financial firms there’s a lot of ‘hidden’ liability here thanks to Aviva’s massive investment operation, which earns the company most of its income. Investors tend to think of financial companies as being ‘geared to the market’, which means that the share price movements of firms like Aviva can exaggerate the movements of general financial markets.
It’s no coincidence that Aviva’s share price has been strengthening as stock markets have been rising too, in my opinion. That effect works the other way as well, so beware when the financial markets take a dive, Aviva will follow big time. By extension, it almost goes without saying that Aviva’s operations are highly cyclical.
3) Valuation
Aviva is trading on a 75% premium to net asset value, which stands at around 273p per share.
That suggests that the big yearly share price movements related to the firm’s turnaround might already have occurred.
Expected earnings for 2015 cover the forward dividend around 2.9 times and the yield is about 3.7% that year. City analysts following the firm think earnings will grow about 8% and the forward P/E rating is therefore running at around 9.3, which compares well to such growth and yield expectations.
What now?
Aviva looks like reasonable value when measured against earnings expectations, but investors should be wary of the firm’s cyclicality — look at the recent history of dividend cutting, for example.