Robert Stephens discusses why Aviva could deliver high total returns on the back of its restructuring programme.
Last week’s investor update from insurance giant Aviva (LON:AV.) included plans to reduce costs by £300 million per year by 2022. As part of this, the company intends to reduce headcount by 1,800, which amounts to 6% of its total workforce, over the next three years.
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Alongside cost reductions, the company will manage its life and general insurance businesses separately in the UK. This is part of a wider focus on improving efficiency, while reducing complexity and duplication.
The changes have the potential to produce a stronger and more profitable business in my view, while the stock’s income potential and valuation could mean it has investment appeal over the long run.
A changing business
Aviva’s focus on costs will help it to reduce debt over the medium term. It is aiming to cut its debt pile by around £1.5 billion in total, which is expected to reduce interest payments by £90 million per year.
This could prove to be a worthwhile strategy in what is a highly competitive marketplace. Should growth falter, efficiency could become key to the business maintaining its upward trajectory on profits over the medium term.
Changes to its dividend may mean that it lacks the growth rate of the last five years, during which time it has doubled on a per-share basis. However, with a progressive dividend policy that is intended to provide greater flexibility in terms of how it utilises excess capital, the business may become stronger and more capable of sustaining dividend growth in the long run.
Even though dividend growth may be more modest as the company focuses on efficiency and simplification, rather than rewarding shareholders, the stock’s yield of 7.2% is relatively high. It is 260 basis points higher than that of the FTSE 100, with the company’s recent disappointing share price performance boosting its yield.
In fact, since May 2018 the Aviva share price has fallen by 24%. This means that it now trades on a P/E ratio of 11. With earnings per share forecast to rise by 8% this year, and there being the potential for further growth as it cuts costs and debt levels, the stock appears to offer good value for money.
Although a period of significant change for the business could lead to heightened volatility in its share price, ultimately it may create a leaner and more profitable entity over the long run.
Aviva continues to have a number of potential growth areas that could catalyse its financial performance. For example, it is investing heavily in digital opportunities such as MyAviva and Wealthify. They are expected to align the company’s offering with evolving consumer tastes, while also improving customer service levels.
Although the business has struggled in Canada, its recovery appears to be taking hold. While there are uncertainties facing the UK economy at the moment, the company appears to have a strong position within key markets that may be further consolidated by its restructuring.
Therefore, with a low valuation, a sound strategy and impressive income investing potential, Aviva could offer increasing investment appeal over the long run.