Stock market

Down 8.5% this month, are Aviva’s share price too attractive to ignore?

It looked real Aviva (LSE: AV.) shares were set to break above £5 for the first time since the March 2020 global market crash. Technically, it did for a minute at the beginning of April. But I’m not counting it.

Will the stock retest this level soon or will it go even higher?

The drop

Let’s first discuss the reason behind the recent pullback. The main drop in recent weeks was on April 11, the day the stock went ex-dividend.

If I buy the stock on its ex-dividend day, I am not entitled to the next cash dividend. Instead, this cash payment goes to the seller. Hence, shares lose their appeal for passive income. April 11 saw several names going ex-dividend, and all fell as a result.

Since then, the share price has fluctuated but is at par with the closing price after the sale.

Although access to the next dividend is not available, Aviva has a strong yield of 6.9%, which is a big plus for an asset in my portfolio.

Trend is your friend.

One positive that makes the recent pullback look more like an opportunity than a problem is that the trend is still holding. In fact, it has been trending higher for the past several years.

That’s a comfortable gain of 80% from the 2020 low, 25% from the 52-week low, and 5.5% year-to-date.

I much prefer to find and invest in names that are already showing signs that buyers are in control rather than trying to find the bottom of a falling stock.

Along with rising share prices over time, which may have contributed to external factors such as an improving economy, fundamentals also support continued upside.

Strong prediction

Aviva reported better-than-expected operating profit last month, and its new guidance suggests an upgrade to the current consensus. The company has set a new target of £2bn a year in profits by 2026. Additionally, it plans to increase dividends to return more to shareholders.

The recent acquisition of Probitas gives Aviva access to Lloyd’s of London’s insurance market. I think this is a unique deal that combines an asset with attractive margins and gives Aviva access to a new market.

Aviva’s bulk annual turnover has grown rapidly, and the company is targeting a bulk annual turnover of £15-20bn over the next few years.

Risks

Rising rates and yields pose risks for insurers. However, if they manage these risks properly, they can take advantage of the best opportunity to increase the profitability of their business.

Insurance companies may also be at risk of losing a lot of money due to natural disasters, major accidents, or large-scale claims. These events can damage their finances, especially when unexpected or rare events occur.

Overall

I think Aviva has the right fundamentals to continue to advance on its recent trend, not only towards the recent £5 level (up 8.5%) but also towards pre-pandemic levels. So, I am considering it as a long-term investment at the current share price.


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