Why I'm Fed Up With Aviva

LONDON -- Insurer Aviva  (LSE: AV  ) (NYSE: AV  )  has been singled out as one of the great undervalued stocks of the FTSE 100 ever since I bought it three years ago -- but, so far, that value remains untapped. While the rest of my portfolio races ahead, the U.K.'s largest insurer takes two steps back for each step forward. After briefly stirring into life lately, it has just stumbled again. Frankly, I'm getting a little fed up with it.

In a jam
Aviva's lowly valuation and high-flying yield makes it look like a great comeback stock. It is the second-highest-yielding stock on the FTSE 100, chucking out an income of 7.27% a year. Compare that to the rate you are getting on your savings, and it makes you wonder why more investors aren't buying it. But there is a reason Aviva looks "cheap." With 60% of its business in Europe, it is heavily exposed to the eurozone crisis. And it hasn't necessarily fared better elsewhere, suffering a 876 million-pound writedown on its U.S. business in the first half of last year.

When I bought Aviva, I knew I would have to be patient. Turning this wayward, lumbering beast around was going to take time. But there is a limit. Jam tomorrow, I'm prepared to wait for. Jam whenever, that's a different matter.

Last summer, after Aviva's share price plunged 25%, analysts were queueing up to claim it had finally turned a corner. Unfortunately, there are plenty more corners ahead.

Big in France
Aviva has been busily stripping out non-core businesses with a string of disposals, and working hard to build its capital and financial strength. It has plumped up its financial cushion, with its IGD capital surplus hitting 3.7 billion pounds at the end of October, up 600 million pounds in just four months, and is now scratching around for 400 million pounds in cost savings. It has performed respectably in the U.K., Canada and France, but is still heavily exposed to Europe, notably Spain and Italy. Its U.S. life and annuities business, which it hopes to offload in a lucrative sale, has struggled. Another worry is that unlike rival FTSE-100 insurers Prudential and Legal & General, it has relatively low exposure to fast-growing emerging markets.

True to the Pru
It's not as though the sector as a whole is in trouble. I hold Prudential, and I haven't had to be patient with that. It is up 30% over the last 12 months, while Aviva is down -1%. Over five years, Prudential is up 60%, Aviva is down -35%. That's what happens when you end up "in the right markets, with the right business models," as Prudential's management bullishly puts it (neatly glossing over chief executive Tidjane Thiam's doomed 36 billion-pound attempt to buy AIA Group in 2010). With Aviva, both those rights have been wrongs, but I knew that when I bought it. The losses had already been made, but I'm still waiting for the profits. And waiting.

Breaking Asia will take time and, with Aviva's life insurance sales falling in China and India, there are still plenty of corners to turn. It is no accident that Aviva trades on a lowly eight times earnings. So yes, I'm fed up, with only that whopping yield to lift my spirits. Nobody seriously expects Aviva to sweeten that juicy dividend, but at least it hasn't diluted it. That could still happen, especially since it is only covered 0.7 times, which wouldn't exactly enhance my mood.

Would you Adam and Aviva it?
So am I selling? No, I still believe it will come good. Markets can fall back in love with a stock, just as urgently as they fall out of it, and I'm confident my patience will eventually be rewarded, even if I have to wait until 2014 or 2015. I also have the nagging fear that the moment I do sell Aviva, it would suddenly be jam everywhere. And then I would be really fed up.

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