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Buy Aviva at 295.9p Says Robert Sutherland-Smith of UK350.com Making the most of his extensive knowledge and long City experience, Robert Sutherland-Smith takes a sensible long-term approach to investing, identifying the stocks with the greatest potential from the FTSE 350. To get a fortnightly newsletter from Robert, featuring his analysis of the market outlook, a new recommendation and updates on previously tipped stocks, join UK350.com now. Buy Aviva (AV.) at 295.9p Linguistically, Aviva (AV.) the name of the FTSE 100 insurer and life assurer is linked to the Spanish verb ‘Avivar’ (suitably with the ‘r’ missing to demonstrate that it is advertisers' Spanish rather than the King of Spain’s Spanish), which translates as to arouse, kindle, light up and stimulate. Clearly, Aviva the FTSE 100 company has kept its ‘avivar’ well hidden in the last year or so. In the ancient days of 2007 the share price was near a glorious 700p. Last seen, the price of the shares were 295.9p having recently been as low as 251p. Over five years Aviva has massively underperformed the FTSE100 index and its peers in the shape of Legal & General and Standard Life. On my estimate the share price has underperformed the FTSE100 by 48% over the last five years, the Legal and General share price by a similar amount and the Standard Life by an estimated 30% or thereabouts. So a lot that’s negative has been discounted. As one would reasonably suppose, the shares are looking cheap and that is always an occasion to examine a share for value. Last year (to 31st December 2011), there were not enough earnings to cover the dividend, which was paid out of capital. In 2011 earnings per share were 17p but the dividend payout was 26p. Clearly, the historic dividend yield of 9.1% is a big attraction. If that was reduced, it would still leave potential for a generous dividend payout although the historic price to earnings ratio of 17 times is still steep. However, that high prices earnings ratio is an indication of potential earnings recovery It is evident from the statements of the new Chairman, John Fraser, that management is listening attentively to shareholder criticism by itemising the criticisms and matching them with policy responses. In short, the company needs more capital and to focus on its more profitable lines of business. There has been market talk of selling the US business. European, exposure to financial services has been reduced by selling most (and deconsolidating) Delta Lloyd NV along with the RAC business. The company appears to have plenty of scope for executing (a new CEO is envisaged as being in place by the year end) the stated strategy for rationalising, refocusing and increasing the capital efficiency of the business. Some of that seems to have come through in the Q1 results for the current year with a 45% improvement in the Euro IDG directive on capital requirements, to £3.2 billion. In the quarter, the company also generated a further £0.5 billion of operating capital. Its accounting driven NAV rose from 435p to 445p and its measure of ‘embedded value’ to 506p. Analysts translate all this to indicate a significant recovery in profits this year, with earnings forecast to jump from 17p last year to 55p this year and a potential 57p next year. Naturally, the dividend will not increase by much, in those circumstances but it is already high in relation to the current share price of 289p.On that estimated forecast basis we are looking at a projected price to earnings ratio of just over 5 times and a dividend yield of around 9%. Here seems to be a situation in which the upside is far greater than the downside, given these numbers and an embedded value number which is some 75% greater than the share price. Naturally, trading conditions in Europe are poor but company should be able to achieve much improvement internally. At 295.9p a buy.
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