FTSE 100 insurer Aviva (LSE: AV) had a pretty bad last week, with a steady tumbling in share price. From the end of the week before to the last close at the time of writing, the share price fell almost 9%. This was triggered by its decision to retain its Asian businesses in China and Singapore, while planning to hive off all the others, after months of speculation on its de-merger, much like that of its rival Prudential.
When considering its prospects from an investor’s point of view, I see three questions as critical:
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One, how material are the latest developments for AV’s future?
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Two, what other important changes taking place in the company, if any, can impact it in the future?
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Three, the most staple question, what does the past tell me about its future?
Small Asian market
To answer the first question, the operating profit from its entire Asian business is less than 8% of the group’s total. In other words, it’s a small market for AV. The biggest chunk comes from Singapore, which generated much of the earnings in 2018. The rest of AV’s Asia business, which includes China, India, Indonesia, Vietnam, and Hong Kong, added the remaining.
Aviva also gets some earnings in the region through Friends Provident International (FPI), which it bought in 2015. It has been intending to sell off FPI too, which has a client base in the Middle East and Asia, but to no avail.
While the Asia business isn’t significant, the fact that AV’s not been able to sell of FPI so far and has now partially retracted from selling off its Asia business is arguably making investors impatient.
Change in guard, change in strategy
Part of this change in plan could be because of a change in guard. Present CEO Maurice Tulloch took up the position only in March this year and has a vision for the company that differs from that of his predecessor. Instead of splitting the company by geography, he’s more keen on a product-based approach, with life and general insurance being two different businesses.
But that of course, will play out in its own time, and going by AV’s recent U-turn, I’m not holding my breath.
Weighing in
That said, Aviva does have some things going for it. It’s still a quality share – a large, profit-making company that hasn’t disappointed over the long term. Its price-to-earnings ratio at 7.6 times is also lower than for peers like Prudential at 10.6 times. Its share price has also performed well for the past few months. I last wrote about AV a little over two months ago and it rose by over 8% from then until the time the Asia business news broke out.
For dividend investors, this is still a great stock with an expected 7.1% yield, but for those of us looking for capital appreciation, I’ll be more than happy to re-analyse this otherwise quality company once the share price shows more consistency.