Shares in Aviva (LSE: AV) (NYSE: AV.US) have delivered reasonable gains during the course of 2014, with the insurance company rising by 5% versus just a 1% gain for the FTSE 100 during the same time period. Indeed, since Aviva slashed its dividend in March 2013 its shares have risen by 70%, while the FTSE 100 is up just 6%. Clearly, new management is winning back the confidence of investors and, furthermore, the company looks all-set to have a bright long-term future. Here’s why.
A New Strategy
A key focus of the relatively new management team has been on implementing a simpler strategy. For instance, Aviva continues to simplify its portfolio of businesses and just last quarter disposed of its Turkish general insurance business, its US asset management boutique, the South Korean joint venture, as well as a major restructuring of its Italian business. The aim of this strategy is to allocate capital where it can be most efficiently utilised, in terms of risk and reward, as well as to focus on the most profitable areas of the business.
A Growing Bottom Line
In terms of profitability, Aviva is making excellent progress. For instance, it is forecast to return to strong growth in the current year, with earnings per share (EPS) forecast to grow from just 22p last year to 46p this year. This is highly encouraging news for shareholders after Aviva posted losses in 2012 (which led to the change in management and the cutting of its dividend). Furthermore, Aviva is expected to increase EPS by 11% next year, which is above and beyond the wider market growth rate of mid-single digits.
Dividend Increases And An Attractive Valuation
Clearly, Aviva is not as attractive as an income play right now as it was prior to the dividend cut. For example, it currently pays out 16p per share in dividends, while it paid out 26p in 2011. This, combined with the previously mentioned share price growth since March 2013, means that Aviva yields a very average 3.3% at present. However, dividends per share are set to increase by 14.5% next year alone, as a higher profit allows Aviva to be more generous to its shareholders. This means that Aviva has the potential, at least, to become a top income play.
Meanwhile, with shares trading on a price to earnings (P/E) ratio of just 10.8, they appear to offer great value for money. This, combined with a growing yield, sound strategy and growing profitability, means that Aviva could be a great long term play that could make a hugely positive contribution to your mortgage repayments.