Aviva (LSE: AV) shares are having a good run at the moment. Recently, the insurance giant’s share price has risen to levels not seen since 2018.
Should I buy Aviva shares for my own portfolio? Let’s take a look at the investment case.
3 reasons to buy Aviva shares today
Right now, there are a number of things to like about Aviva from an investment perspective. One is that the company is now a much leaner business than it was. In the group’s recent 2021 results, it said it had successfully completed the sale of eight non-core businesses last year.
“Aviva is now a much simpler, leaner business, focused on our core markets in the UK, Ireland and Canada,” said CEO Amanda Blanc. “We’ve achieved a lot in the last year but we’re only just getting started,” she added.
Secondly, the stock looks like it could be a cash cow for investors in the years ahead. For 2021, Aviva declared a dividend of 22.05p per share, up 5% year-on-year. That represents a yield of around 4.8%, at the current share price. However, for 2022 and 2023, the group is aiming to pay out dividends of 31.5p and 33p per share respectively.
Meanwhile, the group recently announced a proposed £3.75bn capital return to the holders of its ordinary shares by way of a ‘B share scheme’. This is in addition to the £1bn share buy-back which is currently underway. Overall, the potential capital returns here look very appealing.
Finally, the valuation seems very reasonable. At present, City analysts expect Aviva to generate earnings per share of 43.9p for 2022. That puts the stock on a forward-looking P/E ratio of about 10.4, at the current share price. That’s significantly lower than the average FTSE 100 P/E ratio.
2 risks to consider
However, while there are plenty of reasons to be bullish on Aviva shares, I do have some concerns about the stock. One is in relation to the company’s competitive advantage.
The insurance and investment management industries are highly competitive and Aviva is up against some major players, including the likes of Zurich, BlackRock, and Allianz. Does the company have an edge over these rivals? I don’t see one. That adds risk.
Secondly, Aviva has been a very inconsistent performer in the past. This is illustrated by its dividend track record, which is very patchy. For example, in FY2019, the group reduced its dividend by nearly 50%. So while the near-term dividend prospects here look attractive, there’s no guarantee that Aviva will be a good dividend stock in the long run.
Aviva shares: my move now
Given Aviva’s inconsistent track record, the stock is not a buy for me just yet. I want to see more evidence of its transformation. Right now, I think there are better stocks to buy.