Locking in a second tranche of market-beating income

When we initially recommended buying Aviva (AV.) it was for good reason. The insurance giant had undergone a transformation that saw it emerge as a robust, cash-generating machine which translated into bumper payouts for shareholders.

Fast forward to today, and we find ourselves revisiting Aviva with renewed enthusiasm. Whilst the general insurance market has seen a decline in premiums due to rising repair costs, and Aviva’s share price has underperformed, many of the catalysts that make Aviva a compelling buy remain.

Dividend yield and security

One of the primary drivers behind our initial recommendation was Aviva’s ability to deliver market-beating income to investors. This trend remains firmly intact, with Aviva continuing to reward shareholders handsomely.

While no dividend income is guaranteed, the security surrounding Aviva’s dividend appears robust. The company boasts a cash-rich balance sheet with low levels of debt. Additionally, dividend cover is forecasted to be 1.29 by the end of FY23, providing further assurance of the dividend’s sustainability.

Bulk annuity business continues to flourish

Aviva reported a solid set of interim results in August, with operating profit exceeding expectations, cost management under control, and a promising medium-term outlook.

And despite challenges in the wealth management market, Aviva’s long-term direction is positive.

Aviva projects a 5-7% increase in Group operating profit for 2023 compared to 2022 and is on track to exceed its financial targets, including a £750 million gross cost reduction by 2024, a year ahead of schedule.

Back to the ‘buy zone’

The art and science of technical analysis when used correctly can really help to enhance our market timing.

We can see from Aviva’s candle chart (below) that the shares have formed a number of spike lows over the last two years. It’s no coincidence that these spike lows are printing at very similar prices because markets have a memory.

When prices return to a level which marked a key inflection point, like a major spike low, those buyers who profited from the previous bounce, and those who missed the opportunity to buy last time, tend to step back in and support prices.

Of course, support levels do break from time to time, but a cluster of major spike lows like Aviva’s marks a key ‘buying zone’ or support zone for the stock.

Aviva’s recent price action has seen the shares retreat back to the ‘buy zone’ during the summer months, before starting to bounce.

This recent bounce from the buy zone suggest that buyers are stepping in once again to support the stock. And, given Aviva’s market-beating dividend, we believe the technical timing is supportive of a second tranche buy.

50% below Fair Value

Aviva’s share price scores well across a number a value metrics…

The shares trade on a forward PE of 8.1, which looks attractive relative to forecast double-digit growth in earnings per share (EPS) over the next two years.

Aviva has a Price to Book Value of 1.11, a Price to Free Cashflow of 1.2, and a Price to Sales of 0.65 – all of which paint a picture of a value-oriented stock.

For investors using discounted cash flow (DCF) analysis to determine a fair price for the stock, Aviva’s estimated Fair Value share price of £7.62 is particularly striking. This estimate is more than double Aviva’s current share price, indicating a significant potential for appreciation.

Overall, with the shares looking great value on a fundamental and technical basis, we’re more than happy to snap up a second tranche of this stock.