Aviva share price: will earnings to shed further light on strategy?

Aviva reports full-year earnings results next week, giving those invested in the company’s share price the chance to see whether the firm’s new business strategy is beginning to pay off.

Aviva’s [AV] share price has had a torrid end to the month, as it dropped 10.9% from 409.7p on 19 February to 364.7p as of 27 February.

The UK’s largest insurer had seen its share price stand at a healthy 438.4p in mid-November, buoyed by hopes of a Brexit resolution and a potentially lucrative sell-off of its operations in Singapore and a joint venture in China as part of a strategic review.

However, the group’s decision that same month to retain its operations in both territories disappointed some investors - who were eyeing a cash windfall - and heralded the start of the share price slide.

Despite a short-term share price bounce after Boris Johnson’s majority win in the General Election, Aviva’s share price has continued to weaken as the PM talks tough around an EU trade deal, raising fears of a no-deal Brexit at the end of the year.

In short, anything that looks negative for the UK economy and raises fears about doing business in Europe is typically bad news for Aviva’s share price. This also largely explains its fall from a price of 547.5p in March 2015, as the UK economy got bogged down following the Brexit referendum. Indeed, some analysts believe Aviva has never, like many of our major finance firms, recovered from the financial crisis of 2008/09.

What can we expect from full-year results next week?

In its half-year results, Aviva reported a 1% rise in operating profits to £1.4bn, boosted by general insurance lines, but noted struggles in its life insurance and asset management units.

For the full year, the company is expecting operating profit to be broadly in line with management expectations. Last year, it reported a profit of £3.12bn.

The company is also bullish regarding its new strategy, which was revealed last November.

Led by chief executive Maurice Tulloch, it promised to invest £1.3bn over the next three years in order to simplify the business. It also plans to reduce its £1.5bn debt and separate its UK life and non-life insurance business.

It also aims to make between £8.5bn and £9.5bn in cash in the four years to December 2022, and deliver a 12% return on equity.

Tulloch also committed to putting a progressive dividend policy in place to increase payments over the long term. In the first half of the year, its interim dividend rose by 3% to 9.5p. in the first half of the year, and has a very attractive dividend yield of over 7% on a low price-to-earnings multiple of 7.

Aviva share price vitals, Yahoo Finance, 04 March 2020

The opinion on Aviva

Kirsteen Mackay, writing in the Motley Fool, has said this should be a reason for investors to get on board.

“I feel you won’t get a better long-term sustainable dividend in a well-run FTSE 100 company,” she said. “The Aviva P/E ratio is at historic lows and won’t stay here forever. 2017’s P/E ratio was 31 times earnings. Doubling the earnings per share to 35p saw 2018’s ratio drop to 14. If earnings leap to the 53.2p per share City analysts expect, then next year’s P/E ratio will jump back to 13, and you’ll pay far more per share than you would today.”

Investors could also see an opportunity to buy into Aviva’s share as a protection against the hugely damaging impact the coronavirus is having on stock markets.

Helal Miah of the Share Centre believes life insurance businesses should be immune to concerns over the deadly virus. It has Aviva’s share price on its recommended stocks list.

"The overall business will be fine, and sales will continue to be reliable even if the virus spreads. Of course, they would have to pay out if there was a rise in fatalities, but there would also be plenty more people looking at insurance," he said. 

“The overall business will be fine, and sales will continue to be reliable even if the virus spreads. Of course, they would have to pay out if there was a rise in fatalities, but there would also be plenty more people looking at insurance” - Helal Miah

Aviva is clearly a strong dividend stock, but is it a growth opportunity? The (hopefully) short-term impact of the coronavirus aside, it has a new strategy in place with a focus on in-demand areas such as general insurance and expects to benefit from remaining in Asia.

As with other financial stocks though, Aviva’s share price really needs the UK economy to get fully back in gear and leave Brexit uncertainty behind if it is to reach its full potential.