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Should I Invest in Aviva

LONDON -- To me, capital growth and dividend income are equally important. Together, they provide the total return from any share investment, and as you might expect, my aim is to invest in companies that can beat the total return delivered by the wider market.

To put that aim into perspective, the FTSE 100 has provided investors with a total return of around 3% per annum since January 2008.

Quality and value
If my investments are to outperform, I need to back companies that score well on several quality indicators and buy at prices that offer decent value.

So this series aims to identify appealing FTSE 100 investment opportunities, and today I'm looking at Aviva  (LSE: AV  ) (NYSE: AV  ) , the U.K.'s largest life and general insurance company.

With the shares at 330 pence, Aviva's market cap is 9,725 million pounds.

This table summarizes the firm's recent financial record:

Year to December 2008 2009 2010 2011 2012
Revenue (£m) 36,206 34,690 31,805 26,255 22,744
Net cash from operations (£m) 8,095 2,685 1,807 (342) 2,294
Adjusted earnings per share 62.9p 45.1p 37.6p 11.1p (15.2p)
Dividend per share 33p 24p 25.5p 26p 19p

In an effort to turn Aviva's declining business around, the new CEO is focusing on cash flow and debt reduction. The firm has already sold off operations in markets like the U.S., Russia, Malaysia and Sri Lanka, which although reducing net asset value, allows concentration on key markets.

Recent news is good. The Combined Operating Ratio, a measure of underwriting business performance, has come in at 96% during the first trading quarter of the year-anything below 100% means insurance operations are making profit. But that figure masks a mixed underlying performance with Ireland making a loss at 108%, the U.K. achieving 98% and Canada operations romping home with 93%. Also in the quarter, the firm's net asset value rose 9% to 302 pence per share and operating expenses declined by 10%.

However, the director's reckon the Value of Life New Business (VNB) is a good indicator for future cash flows, and it increased by 18% to 191 million pounds over the period. That figure combines a mixed performance across regions with positive results from places like Turkey, Asia, Britain, France, Singapore, and China, and disappointing results from places like Spain, Italy, Poland, and several other markets.

With a steadily improving macro-economic environment and Aviva's focus on reversing the company's decline, I'm optimistic about the firm's total-return prospects from here.

Aviva's total-return potential
Let's examine five indicators to help judge the quality of the company's total-return potential:

1. Dividend cover: free cash flow covered last year's dividend more than twice. 4/5

2. Borrowings: at the last count, gearing stood at about 50%. 4/5

3. Growth: revenue and earnings have been declining with cash flow holding up. 2/5

4. Price to earnings: a forward seven or so sits below growth and yield expectations. 4/5

5. Outlook: satisfactory recent trading and a cautiously optimistic outlook.4/5

Overall, I score Aviva 18 out of 25, which encourages me to believe the firm has potential to out-pace the wider market's total return, going forward.

Foolish summary
Aviva scores well on my business quality and valuation indicators, although the record of growth is poor. As a turnaround prospect, I'm tempted to invest in Aviva.

But there is still uncertainty around Aviva, especially when compared to the companies featured in "5 Shares to Retire On," a new Motley Fool report prepared by our top analysts highlighting five shares with seemingly impregnable, moat-like financial characteristics. They are shares that deserve consideration for any investor aiming to build wealth in the long run. For a limited period, the report is free. To download your copy now, click here.

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