In early January, the Aviva (LSE:AV) share price hit 690p. Since then, it has been trending lower, and currently sits at 616p. Even though the stock is still up a modest 1% over the past year, there are signs it might have already hit its peak for the rest of the year. If further gains might be hard to come by, does it still make sense to buy the stock?
Elevated expectations
Aviva shares had already enjoyed a huge rally before the recent dip. In fact, back in January, the stock had almost doubled in value from levels seen in Q3 2023. The rally over the past couple of years has been justified, with stronger profitability and optimism around the Direct Line deal. However, as we currently stand, I believe investors have now factored in all the good news and have a high bar of expectations going forward. This in itself makes it hard for the stock to keep rallying.
Evidence of this was seen back in March, when the company reported strong full-year results. Operating profit topped £2.2bn and management upgraded long-term ambitions again. Yet the stock finished the day lower, and continued to fall in the weeks that followed. To me, that’s a clear sign that the bar has potentially been set too high for what some are expecting from the business.
Treading on eggshells
It’s possible to conclude that if the business does really well this year, the share price still might not rally. But on the flipside, if cracks start to appear, things could get ugly fast.
In terms of potential factors, the Direct Line integration could become messy. Big insurance mergers rarely run perfectly smoothly. Everything from job cuts to regulatory scrutiny creates uncertainty.
Another worry is that insurers remain exposed to economic volatility. Falling stock markets hurt wealth assets under management. People might pull their money out and sit in cash instead. Political instability can also hit confidence and investment returns. In fact, Aviva’s CEO, Amanda Blanc, spoke earlier this month about the UK and said “there have been too many changes of government strategy, leadership, just in my six years of being CEO, and I think that is harmful to a major economy such as the UK and how we are perceived abroad.”
The other side
I don’t want to paint too gloomy a picture. Aviva is a solid company. Earnings are growing, which is supporting the dividend. With a yield of 6.32%, it’s certainly appealing for income investors. Further, the Direct Line takeover could unlock far more value than the market currently expects. Management believes cost savings and efficiencies can materially improve earnings over the next few years. If that’s the case, even the lofty bar might need to be notched higher still.
Overall, I do think the stock could struggle to materially push higher this year, and so I think there are better options for investors to consider.
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Jon Smith has no positions in the shares mentioned.
