Before Aviva’s (LSE: AV) results last week I had been seriously considering selling the stock.
No man’s land
Following my 50th birthday a while back, I decided to sell all but a handful of my growth stocks. Instead, I bought shares in even more companies that paid high dividends, and the higher the better.
Why this strategy? At my age, I want to have a regular stream of high revenue coming from my investments. This means dividend stocks paying high yields.
Sure, yields change as dividend payouts and share prices move. But at least I’m being paid something, provided I choose the stocks well.
Growth stocks, on the other hand, frequently pay no dividend at all. My only return from these is if the shares rise in price, which is often a big if. The handful I retain are proven winners over the long term, so far at least.
My problem with Aviva before its 2023 results were announced on 7 March was that it was in a no man’s land for me.
It was yielding under 7%. That’s my minimum for a high-yield stock. Why? Because the ‘risk-free rate’ (10-year UK government bond yield) is just over 4% and stocks are much riskier.
And its share price hadn’t been notably higher – above £5 – since 25 June 2018 (closing price, £5.04).
Dividend increased by 8%
In its 2023 results, Aviva increased the dividend by 8% to 33.4p a share, from 31p in 2022. On the current share price of £4.67, this gives a yield of 7.15% — above my minimum threshold, for now.
It also announced a new £300m share buyback programme to begin immediately. Buybacks tend to benefit share prices.
Both initiatives are supported by a 9% rise in operating profits in 2023 to £1.47bn, from £1.35bn in 2022.
A risk in the stock is that inflation rises again in Aviva’s core markets of the UK, US, and Canada remains elevated.
This would prevent interest rates from falling as expected and keep the cost of living high. In these circumstances, existing clients may cancel policies and new customers may be deterred.
Another risk would be a genuine new financial crisis.
However, mitigating both these for me is its continued strong capital generation. In 2023, Solvency II operating capital generation rose 8% — to £1.46bn, from £1.35bn in 2022.
Its overall Solvency II ratio stands at 207%, against just 100% as the regulatory standard for insurance companies.
Undervalued against its peers
Even without any effects from the planned share buyback, Aviva looked cheap to me.
On the key price-to-earnings (P/E) stock valuation measurement, it currently trades at 12.4 – against a peer group average of 18.
A discounted cash flow analysis shows it to be around 43% undervalued at £4.67. So a fair value would be around £8.19, although it may never reach that price, of course.
So, I’m not going to sell my Aviva shares. But I’m not going to buy more either, as the holding I have is at a lower price and I’m happy with that.
But if I did not have this holding, I would undoubtedly buy the stock. It has a good yield, undervalued shares (in my view), and its results point to a strong core business.
This post was originally published on Motley Fool
