The Aviva (LSE:AV) share price has taken a hammering during the coronavirus crisis. It is down more than 40% this year, which you might expect. Worryingly, it failed to participate in the FTSE 100 rebound in March and April. This tells me investors are suspicious about its prospects.
Aviva slipped today after its operating update showing an estimated £160m of additional general insurance claims stemming from the pandemic. Yet I still think this FTSE 100 dividend hero is in better shape than recent performance would suggest.
I should have said fallen dividend hero back there. Last month, Aviva cancelled its final 2019 payment. This follows requests for dividend restraint from regulators, although not everybody listened. Rival insurer Legal & General Group is still paying its dividend.
Aviva share price crash
There are benefits to cancelling the dividend. This has bolstered the firm’s Solvency II cover ratio, estimated at 182% at the end of March. Today, management said it has the capital strength and liquidity to get through the crisis.
Aviva reported a 28% rise in new life insurance business to 31 March, with new UK Life business sales up 162% to £2.9bn. Bulk purchase annuities were particularly strong. General insurance sales rose 3%, helped by a recovery in Canadian premiums. The Aviva share price has solid foundations.
The group’s investment operation has done fairly well, although it warns numbers could be hit by “changes in investment performance, capital generation, and remittances”.
There was no way the Aviva share price was going to escape unscathed from the crisis. However, I think markets are taking an overly dour approach to its prospects. Yes, management has suspended the dividend, but when the pandemic recedes, it will be back.
Capitalisation looks healthy, so the group’s future is in little doubt. Obviously, a long recession and slow recovery will hit its investment arm in particular, and knock insurance sales too. That’s how it is with every company, right now. There are risks to investing today, but also potential rewards.
Dirt cheap FTSE 100 stock
Lately, investors have prized Aviva for its dividend, which is sorely missed. Management will be keen to restore shareholder payouts to reward loyal investors as soon as it can.
If you buy today you will not get any income to tide you over until the stock picks up, which is a blow. However, its dirt cheap valuation reflects this, with the Aviva share price trading at 3.75 times earnings, one of the lowest on the FTSE 100.
All valuations have to be taken with a pinch of salt right now, obviously. Yet this does suggest its problems have been priced in. If buying stocks for the long term, as you should be, Aviva’s dirt cheap valuation makes it a tempting buy. Just give it time to recover.
