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Is Aviva’s share price undervalued as Tulloch’s shakeup begins?

Aviva's share price might be up 13% since the start of the year, but June saw the stock flat, gaining just 1%. It seems investors are waiting to see how new Aviva [AV] CEO Maurice Tulloch’s turnaround strategy will play out. 

Announced early June, the strategy will see substantial cuts in personnel and a focus on profitable areas of the business in an effort to bolster the bottom line.

Yet, for traders who believe Tulloch's plans will send the share price higher, now could be the time to buy as there are signs that the stock is undervalued.

Aviva 1-year share price performance, CMC Markets, 1 July 2019

 

What is Aviva’s new business strategy?

Tulloch’s business strategy will see Aviva's UK life and general insurance businesses split into two. Tulloch’s move to divide the business comes after Aviva lost ground to specialist insurers that are able to funnel all resources into performing that one function, well. As Tulloch himself explained when announcing the strategy, Aviva has learnt from its rivals:

“These life companies and general insurance companies are incredibly focused on their customers and growing and winning."

Aviva isn’t the only insurance giant looking to specialise. Legal & General [LGEN] have made a similar decision, unloading LV= , its general insurance business, to Allianz for £242 million.

“These life companies and general insurance companies are incredibly focused on their customers and growing and winning.” - Aviva CEO Maurice Tulloch

 

The strategy shake-up will also see 1,800 jobs cut, around 6% of the workforce. The scale back will be achieved via redundancies, a freeze on new hires over the next three years, and a reduction on the number of contractors used. 

Tulloch admitted spending had “moved in the wrong direction” in past years, and these job cuts will see Aviva shave off £300 million in costs over three years. This would take spending down from £4 billion to £3.7 billion.

 

Are Aviva's shares undervalued?

Now could be the moment to buy into Tulloch’s strategy for traders who think the stock is undervalued.

Shares trade below their net asset value per share of 424p and have a forward P/E of just 6.8. A price to book ratio of 93.59 is lower than Standard Life Aberdeen's [SLA] 97.00, and far lower than Legal and General's 186.38. With the current price 23% below its 52-week, there could be some upside.

Anything Tulloch can do to cut costs and increase the company’s 7.2% profit margin will be welcomed by shareholders, especially as quarterly revenues have fallen 44% year-on-year.

 

Market cap$16.6bn
PE ratio (TTM)11.22
EPS (TTM)37.80
Quarterly revenue growth (YoY)-41.90%

Aviva share price vitals, Yahoo Finance, 1 July 2019

 

How does Aviva's dividend look?

One area that investors won't want to see cuts to, is the dividend. Aviva touts a 7.19% forward yield and a 74.74% payout ratio. Over the past 12 months, Aviva has rewarded investors with earnings per share of 37.80p.

Dividends were up 15% to over £1.1 billion last year, an area that Tulloch highlighted as one that is particularly important to protect, during his recent strategy update. 

£1.1billion

Dividends paid out last year

  

Yet, for all the tough talk, investors should be mindful that the dividend is only covered by a 1.26x earnings multiple. This is below the 1.5x safety mark and any dip in earnings could see the dividend come under pressure.

 

What do analysts think?

RBC rate Aviva’s stock as a “Top pick”, pointing to opportunities in the UK market and savings to be had from pulling out of underperforming areas abroad. UBS also underlined its support for Aviva last month, upping its target price by 10p to 490p, and reaffirming its "Buy" rating.

Of the 21 analysts that follow the stock on Yahoo Finance, 13 of them either rate Aviva shares as a 'Strong Buy' or a ‘Buy’. The average price target is 551.33p, a 34% upside if hit.

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