Should I invest in Aviva, down 26% over 16 months?

At 400p, the share price of the FTSE 100’s Aviva  (LSE: AV) has fallen around 26% over the past 16 months. We’ve become used to such volatility in the stock over the years because the firm’s life and general insurance and asset management business operates in a cyclical sector.

And the dips in the share price can make the valuation look compelling. Right now, the forward-looking earnings multiple for 2020 is just below seven, and the anticipated dividend yield is a little over 8%. But I wouldn’t pile into the shares based on valuation alone. It seems to me that the market thinks something could be wrong, as suggested by the falling share price.

Is there a downturn in earnings coming?

My guess is that investors could be expecting a downturn in earnings. And why not? A glance at the five-year trading record reveals to us that earnings and cash flow have been volatile, as we might expect from a cyclical company. And the most recent financial report arrived in August revealing to us some cracks in the firm’s performance.

With those half-year figures, we can see that around 74% of operating profit came from Aviva’s Life business. But those earnings were down 8% compared to the equivalent period the year before. Some 22.5% of overall operating profit came from General Insurance and Health and that division scored a 29% improvement over the year-ago figure. However, the 3.5% of profit that came from Fund Management was down 18% compared to the previous year.

It seems to me there’s been weakness in much of the business in the period. Meanwhile, new chief executive Maurice Tulloch, who started in March, said in the report that he has been working with the other directors to “refresh” Aviva’s strategy. We’ll get an update on the new strategy, objectives and operational and financial targets in November, which will likely include the “strategic options” for the firm’s business in Asia.

Changes at the top

It’s not that the Asian unit is unattractive “strategically and financially”, but the company wants to explore ways of “enhancing the value of the business to shareholders”. Perhaps we could even see a spin-off of the Asian operations down the line. Meanwhile, the narrative in the report talks of a first-half characterised by challenging economic and political conditions and “significant levels of organisational and leadership change.”

Indeed, the head of the UK Life Insurance business stepped down in April and the chief financial officer left his post in June. The new chief financial officer, Jason Windsor, only started in his position on 26 September, so there have been big changes at the top following the arrival of Tulloch as chief executive. Generally, I think a refreshed management team can be good for a business because the process can usher in new ideas and determination.

Tulloch described the half-year results as “mixed” and it seems clear that the firm is engaged in restructuring. However, the cyclicality of the industry is outside the company’s control, and I’m reluctant to invest because the share price has been a fair bit lower than it is today on previous cyclical dips and it could revisit those bottoms.