The Aviva (LSE: AV) share price has fallen by more than 20% over the last two years. The stock has lagged the FTSE 100 index, which has fallen by less than 5%.
However, shares in this unloved insurance firm rose by 12.4% in September. Today I want to take a closer look at recent performance and explain why I continue to rate Aviva as a solid income buy.
Why is the AV share price up?
I try to avoid politics in these articles, but I can’t avoid mentioning Brexit here.
Aviva’s recent surge higher started on 4 September, the day when Parliament voted to block a no-deal Brexit. Big investors appear to believe that the near-term performance of the group’s UK business will be stronger if we leave the EU with a deal.
That seems reasonable to me, as it should minimise the chances of regulatory disruption or volatile market conditions.
However, I think it’s fair to say that very few of us really understand the detailed implications of Brexit for the financial sector.
Let’s move on to a less controversial topic.
Heading for a split?
Aviva’s chief executive Maurice Tulloch has now been in the job for six months. So far, he’s announced three high level goals.
First, Mr Tulloch plans to separate the firm’s UK life insurance business from its general insurance line, which provides services such as motor, home, and travel insurance. He hopes to create more focused and accountable businesses, with lower costs and better customer service.
Second, the company wants to reduce debt levels by £1.5bn by 2022.
And finally, Mr Tulloch has said that he is reviewing “the strategic options for our Asian businesses”. These generated an operating profit of £152m during the first half of 2019, roughly 10% of the group total.
Although the Asian units are delivering strong growth, this part of the business is small compared to the UK, which generated an operating profit of £909m during the first half of this year.
City analysts believe the most likely outcome of a strategic review is that the Asian business will be sold. This would probably generate enough cash to meet Mr Tulloch’s debt reduction target and leave shareholders with a smaller business focused on the UK and Europe.
My view
Aviva shares have suffered against rivals because of the group’s failure to deliver consistent growth or a clear strategic direction.
However, financial performance has improved in recent years and cash generation has been strong. Dividends have risen as a result and last year’s payout of 30p per share was covered comfortably by surplus cash.
Although the outlook is a little uncertain, I think Aviva’s modest valuation reflects these risks. At about 380p, the stock currently trades at a discount to its net asset value of 432p per share and offers a dividend yield of 8.2%.
If profits remain stable, then I’d expect the shares to rally from this level at some point. I remain happy to hold the stock and would consider buying more.