After years of being stuck in first gear, Aviva (LSE: AV.) shares are now motoring happily along. That’s brilliant news for long-term investors who’ve bagged a winning combination of share price growth and a high-and-rising dividend.
The Aviva share price is up 150% over the last five years. Over the same period, shares in rival Legal & General Group edged forwards a mere 15%. So that’s 10 times the growth.
The transformation’s been driven by CEO Amanda Blanc, who’s pushed through asset sales, concentrated on core businesses and worked hard to improve efficiency. Investors have been rewarded for their patience.
Accelerating growth
Latest results, published on 14 August, showed a bumper 22% jump in half-year operating profit to £1.07bn, helped by price increases and higher premium income. Wealth net flows rose 16% to £5.8bn.
The board hiked the interim dividend 10% to 13.1p, underlining management’s commitment to rewarding shareholders.
The stock’s also benefited from a wider market trend, as global investors rediscover the attractions of high-yielding FTSE 100 financials. Markets are now looking ahead to November when the group will set out more details on its £3.7bn takeover of Direct Line, which could add further scale.
FTSE 100 income winner
The momentum’s clear in the share price. Over the past 12 months Aviva’s risen 33.75%. Add the trailing dividend yield of 5.45% and the total return climbs to 39.2%. That means an investor who put £10,000 into the stock a year ago would be sitting on £13,920 today. It’s an impressive result for a company that not so long ago was regarded as a bit of a plodder.
At some point, it’s likely to slow. We may not be far away from it either. Consensus broker forecasts produce a median 12-month target price of 671.2p. That’s just 2.25% above where we are now.
The dividend yield’s forecast to climb to 5.87%, which if correct would give a projected total return of about 8.1%. If our investor kept their £13,920 invested, that would swell the value of their stake to £15,047. That’s a pretty nifty return over just two years.
Stock market risk
There are threats to consider. A global market shock could dent the value of Aviva’s assets under management and slow inflows. The Direct Line deal carries execution challenges, as acquisitions always do. This is a competitive sector, and new growth areas like bulk annuities can quickly become crowded.
With a high price-to-earnings ratio around 27, the group will need to keep delivering strong results to justify today’s high valuation.
Even so, I think the long-term case remains solid. Blanc has restored momentum and even if the growth slows there’s still that income. Analysts are mostly supportive, with nine out of 15 rating the stock a Buy and five saying Hold. None say Sell.
I’ve already got plenty of exposure to FTSE 100 financials, including Legal & General. I’ll stick with that, in the hope that one day it will enjoy a growth spurt too. I could be in for a bit of a weight.
For others, I think Aviva’s well worth considering, but with a long-term view as the excitement may slow a little from here.
