Patient Aviva (LSE: AV) shareholders will be hoping that CEO Maurice Tulloch will finally make good on the firm’s promise to find “a path of stronger financial performance”.
Mr Tulloch is aware that such improvements have been promised before and said on Thursday that “this time I am determined we deliver”.
The firm’s shares have fallen by 24% over the last year, compared to a drop of just 7% for the FTSE 100. Although the dividend remains on track, many investors will be unhappy with the stock’s underperformance.
I’ve been taking a look at the latest figures from the firm. In this article, I’ll explain why I remain happy to hold the stock and believe that performance should improve.
$2bn sale in Asia?
I’ll come back to Aviva’s half-year results in a moment. Although these are interesting, the big news today was official confirmation that the company is considering a sale of its Asian division, which operates in countries including Singapore, Hong Kong and China.
In today’s results, Mr Tulloch said that the group’s Asian businesses have “excellent growth and earnings potential”. Most City analysts believe that a sale is a likely option, as this growth business could be worth more when split from the group’s mature UK operations.
Press reports ahead of today’s results suggested that the Asia businesses could be sold for more than $2bn (£1.65bn).
I don’t know how accurate this is, but this number looks reasonable to me. The group’s Asian operations have generated an operating profit of about £294m over the last 12 months. A $2bn sale price would value the Asian businesses at about 5.5 times operating profit, which seems fair to me.
Dividend increase
Today’s results showed that Aviva’s operating profit rose by 1% to £1,448m during the first half of the year. Operating earnings per share climbed 2% to 27.3p, suggesting that full-year forecasts of 60.2p per share are within reach.
Tough competition in the life insurance market meant that profits from this division fell by 8% to £1,282m. But a strong performance from the general insurance business (travel and motor cover) saw operating profit rise by 29% to £391m.
Although growth is limited, cash generation remains good. As a result, the interim dividend will rise by 3% to 9.5p per share. This suggests to me that the total dividend could reach 31p per share this year, giving the stock a prospective yield of about 8%.
My view
Today’s results are healthy enough, but the group’s lack of growth highlights the challenges facing Mr Tulloch.
I estimate that selling the Asian businesses for $2bn could be worth as much as 50p per share to Aviva. It would create a smaller, more manageable business focused on the UK and Canada. This seems logical to me — the mature markets of Western Europe and North America are different from the faster-growing markets of Asia.
Although some investors will be discouraged by Aviva’s lack of growth, I think the stock is cheap enough to offer good value regardless. After today’s results, the shares trade at a discount to their book value of 432p and with a forecast price/earnings ratio of just 6.3.
The dividend also looks safe to me, with good cover from earnings and cash flow. In my view, this means that this 8% yield could be a strong buy for income investors.
