LONDON -- Last month, shares of Aviva (LSE: AV) (OTC:AVVIY) plummeted on news that the insurer's dividend would be slashed 44% as the firm attempted to tackle its debts and rebuild its capital reserves.
Despite this glum news, I am still positive about the shares' investment potential. Here's why.
I believe the dramatic 15% share-price drop following the dividend cut was a severe over-reaction by the market and is thus an opportunity to buy.
At around 300 pence, the shares still command a dividend yield comparable to that of the industry average of around 5%. I also feel the dividend will now be more sustainable amid Aviva's effort to recover.
Alongside a realistic dividend, Aviva's current share price boasts a price/earnings ratio (P/E) of around 7, which compares to the industry average of around 9.
This P/E discount is a clear indicator of Aviva's potential for share-price growth when a perception of stability is attained and the shock of the dividend drop has passed.
Aggressive attempt to stabilize the company
The dividend cut and the promise to tackle debts and rebuild capital reserves are the first significant actions under new chief executive Mark Wilson.
As an accomplished leader with a history in the industry, Wilson appears to bring a fresh dawn and a new start to Aviva -- one that offers a lower dividend level but in return promises greater potential for salubrious fundamentals and growth.
Indeed, Wilson exclaimed that the dividend cut was the "right course of action," offering "certainty to shareholders, reducing debt, and putting Aviva in a sound position for the future." This outlook bodes well for prospective growth and stability, which Wilson noted needed to be as "simple and predictable as a Swiss clock."
Wilson's commitment to induce stability has even reached the illustrious heights of senior staff bonuses, over 400 of which have been frozen amid Wilson's acknowledgement that they were not warranted after the group's recent meager performance.
A new action CEO
Mark Wilson is a welcome change from the overpaid leadership of ex-boss Andrew Moss, who saw Aviva's shares drop 50% during the four years he was in charge.
Mark Wilson has clearly stated his intention to turn the company around, even risking his own wealth, through spending nearly 500,000 pounds on Aviva shares at the start of March.
I believe this leap of faith bodes well for investors and shows a real commitment to turn the fortunes of the insurer around.
Indeed, Wilson recognised the need to spur investor confidence, stating that his leadership will be that of a "turnaround story," recognising "that the company has not articulated why investors should buy or hold Aviva shares."
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