Like many other companies in the FTSE 100, Aviva’s [AV] share price fell through 2018. It was down 26% across the year, and is currently 67% off its all-time high of 1,177p, which it reached back in 1998.
Uncertainty over Brexit and the future direction of the business has battered the British insurance giant’s stock in the past six months.
Following this decline, Aviva’s dividend yield has spiked to 8.7% however, making it one of the highest yielding stocks in the FTSE 100.
“During these choppy market conditions, it is reassuring that Aviva’s results are consistent, dependable and growing,” then CEO Mark Wilson said in the company’s earnings statement for the first half of 2018.Aviva share price performance, London Stock Exchange interactive chart, as at 7 January 2019
Change in leadership
Aviva shocked investors in October when boardroom discontent over its struggling share price led to the dismissal of Mark Wilson as CEO after six years at the helm.
During his tenure, Wilson cut back the insurance firm’s global output, increased assets to more than £300bn, and oversaw the biggest insurance takeover in a decade. Also under Wilson’s purview, the firm improved its profitability in a massive restructuring that saw it reduce its markets from 28 to 14, increase its operating profits and its investment in technology.
Despite these achievement analysts welcomed his departure. Analyst Alan Devlin said at the time he had “lost investor’s confidence” with the $7.3bn acquisition of Friends Life in 2015, which intensified Aviva’s exposure to the UK market, and the time taken to restructure, which had cost about £250m over the past five years.
28 to 14markets
Aviva's reduction in markets under former CEO, Mark Wilson
There was also the botched advisor platform launch in February that falsely notified advisors about huge drops in the value of their clients’ portfolios.
Shares rose by 1.7% after the announcement of Wilson’s departure, but Barclays sliced its price target from 550p to 416p, while maintaining an ‘overweight’ rating.
Wilson will remain at Aviva until April 2019 to “assist with the transition” until a new chief executive takes over, although no announcement about who that will be has been made yet.
Financial performance: a mixed bag
In the first half of 2018, Aviva reported a capital surplus of £11bn, despite starting with a £600m share buyback and paying off £500m of debt, which hit its bottom line.
The UK insurer saw its operating profit for the whole business decline by 2% to £1.438bn, compared to the same period in 2017 when the figure came in at £1.465bn. Aviva said that excluding disposals, its operating profit would have in fact risen by 4%. However, they also reported a decline of 28% in its general insurance and health businesses.
|Operating profit % change, HY18 YoY||-2%|
|EPS Ratio (TTM)||27.70|
|PE Ratio (TTM)||13.77|
Aviva stock vitals, Yahoo finance, as at 7 January 2019
On the other hand, the company grew its operating earnings per share by 4% to 26.8p for the six months ending June 2018. Its dividend also increased, growing 10% to 9.25p, making it the fourth consecutive year of double-digit dividend growth and “further proof of Aviva’s progress”, Wilson said.
Aviva remains confident that its major market businesses will grow by more than 5% for the full year. Its financial report for the full fiscal year 2018 will be released on 7 March 2019.
Refocusing Aviva’s global strategy
Given the ample uncertainties surrounding Brexit, Aviva is looking to refocus its global strategy.
Out of all its international businesses, Europe is by far its strongest growth driver, particularly its Life business that continues to drive revenue, improve product mix and drive expense efficiencies.
In Aviva’s half-year financial results, Ireland and France reported the best increase in operating profit, rising 11% to £50m and 10% to £279m respectively in the first half of 2018, whereas Canada reported a loss of £13m.
Aviva's Ireland and France businesses' growth in operating profit, reported in their HY 2018 financial results
While its Singapore business did raise profits by 10%, some analysts say the company’s Asia strategy is unlikely to leverage any real growth or expansion opportunities, especially as outside of Singapore it lacks any real market presence in the continent.
Although its France subsidiary is delivering strong returns alongside Poland and Turkey, which are showing high growth potential, the smaller and less strategic businesses outside of these could be candidates for sale, argues Stephen Simpson, writing on Seeking Alpha.
Life insurance sector set to be core revenue driver
In the meantime, RBC analysts have raised their ratings to a buy before a new CEO “takes advantage of the key growth areas of the UK market”, including the retail annuity market, which could drive up the company’s share price.
RBC said that if the insurance giant increases its focus on the UK by “pulling out of non-core areas such as Asia, Italy, Poland and Spain”, the cash proceeds could then be used to invest into the £380bn life insurance space, which it sees as “the best structural growth opportunity in the sector”.
It also believes that Aviva could further dominate the pensions market, especially since its acquisition of Friends Life increased its market share from 6.5% to 16.8% between 2012 and 2017. RBC expects Aviva’s increase in minimum contribution rates to drive annual growth of around 13% between 2017 and 2020.
In addition, the UK’s Prudential Regulation Authority has softened capital requirements for the providers of lifetime mortgages, which will increase regulatory capital for insurers.
For now, there is a lot of uncertainty surrounding which direction Aviva are likely to take, which will undoubtedly come down to whether a new chief executive can address earnings skepticism, franchise quality and the restoration of investors’ faith. With the currently low share price there is however plenty of room for the stock to move, if a turnaround is successful. The first week of 2019 has so far been positive, with an increase of 2.5%.