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The Aviva (LSE: AV.) share price has been gunning it lately, climbing 35% over the past year and a staggering 136% over five. That hasn’t happened by accident.
CEO Amanda Blanc has streamlined the business since joining in July 2020, stripping away underperforming overseas units and refocusing on the UK market. This year’s £3.7bn acquisition of Direct Line should further beef up its market dominance.
Big operating profit jump
Today’s (14 August) half-year results show Aviva keeping up the momentum. Operating profit jumped 22% to £1.07bn, with 66% now coming from capital-light operations such as wealth, health and general insurance. UK and Ireland general insurance premiums rose 9% to £4.14bn, while wealth net flows were up 16% to £5.8bn. Aviva now manages more than £200bn in assets.
The Direct Line deal only completed in July, so its numbers aren’t reflected yet. Still, integration’s apparently well underway and management expects it to boost earnings per share by around 10% once fully embedded.
Investors liked what they saw today, nudging the stock up more than 3% in early trading. That’s a decent move, but these are better than decent results. Perhaps the biggest challenge Aviva faces is high expectations
FTSE 100 sector star
Blanc’s turnaround strategy’s certainly bearing fruit. General insurance operating profit surged 29% in the first half, helped by disciplined pricing and new business growth, while the health arm saw premiums climb 14%. Retirement sales dipped slightly but individual annuity sales rose 29%. Who said FTSE 100 blue-chips can’t fly?
Aviva now serves 21m customers, about four in 10 UK adults. Few can match it for scale.
Stock valuation check
The shares are no longer cheap though. Aviva trades at a price-to-earnings ratio of around 28.7. It makes consistent delivery even more important.
A few years back the shares yielded about 7%, but that’s reduced to 5.3%, mostly due to the share price rally. That’s still comfortably above the FTSE 100 average yield of around 3.5%. And it’s set to continue growing. Today, the board lifted the interim dividend 10% to 13.1p per share. Forecasts suggest a yield of 5.81% this year and 6.24% in 2026.
Hard to grumble about that. With strong cash flows and a Solvency II shareholder cover ratio of 206%, Aviva should be good for it.
Risks and rewards
There are still risks. A catastrophic event could dent insurance profit, while integrating Direct Line might prove more challenging than expected. Annuity sales may fall when interest rates drop away, as they’ll pay less income. Although with inflation sticky, interest rates look set to stay higher for longer.
My big concern is that after such a strong run, Aviva has to slow. It’s confirmed by analysts’ 12-month consensus target of 649.2p. That’s actually 5.2% below today’s 679.2p. Aviva’s riding high today, but it could slip from here.
Blanc’s done a brilliant job and the long-term story remains attractive. Momentum may slow from here though, and investors might want to check other FTSE 100 or FTSE 250 insurers for potential catch-up opportunities. Even so, I think Aviva’s still a stock to consider buying with a long-term view. Especially for income-focused investors.
