Up front, I’m an Aviva (LSE: AV) shareholder, and I was pleased to see the share price recovering following on from a return to healthy liquidity. But I’m also frustrated by the fact that the shares have been in decline since early 2017.
Low value
That brings me to an observation that surprised me, that Aviva shares are the most lowly valued of all insurance firms (life and non-life) in the FTSE 100. Forecasts for the current year put the shares on a forward P/E ratio of only 8.2, dropping as low as 7.6 on 2019 predictions.
Fellow Fool Rupert Hargreaves seems to have nailed the reason for Aviva’s weak confidence right now, as possible legislation from the Prudential Regulation Authority (PRA) could be set to hit the sale of lifetime mortgages. That could require Aviva to beef up its balance sheet, so soon after it had recovered from its earlier overstretched state.
Legal & General is the next cheapest insurer in P/E terms, on multiples of 8.4 and 8 for this year and next, and it’s perhaps not surprising that it’s the other big provider of lifetime mortgages.
Big dividend
The share price stagnation coupled with a progressive dividend policy since the company’s recovery has pushed Aviva’s forecast dividend yields up to record highs. From a yield of 5.4% last year, pundits are suggesting we’ll see 6.1% this year and a very impressive 6.9% next. And those payments would be well covered by earnings, so why aren’t the shares more highly valued?
It’s surely all down to the PRA and the lifetime mortgage thing again. Any future need to strengthen the balance sheet to cope with possible weakness in those mortgage products could put dividends on the front line again. Aviva’s dividend was slashed in response to the banking crisis, and fears are rising that history could be about to repeat itself.
But I reckon the shares would still be good value at today’s price even if the dividend dropped to about 4%. That would be around the current forward average yield of the FTSE 100 (and that’s ahead of its long-term trend), and we’re looking at a Footsie P/E of close to the 14 mark.
Cheap shares?
Even Aviva itself seems to think its shares are cheap, as it has been hoovering them up in a share buyback. Companies tend do that only when they think the shares are significantly below a fair valuation, and that using spare capital in that way will better benefit shareholders than paying special dividends.
The latest buyback programme, which started in May, has just ended this week, with Aviva having bought 119,491,188 shares at an average price of 502p per share. That’s just a little short of £600m returned in total.
It’s arguable that it should have kept more cash back for unseen pitfalls like this mortgage business, and that it perhaps rushed to ramp up its dividends a bit too enthusiastically. But I’m still seeing a long-term buy here, and I’m holding.