LONDON -- Long-suffering investors in UK insurance giant Aviva (AV +2.01%) (AV +1.92%), of which I'm one, will be feeling slightly easier after the market's bullish response to last week's first quarter interim statement. The share price bounced almost 7.5% in a day, and is now up 15% in the last month. Is this the recovery we've been waiting for?
Any investor who chose Aviva as their preferred UK insurance pay will be kicking themselves. Over the past three years, it has grown just 11%, while rivals Legal & General Group and Prudential delivered a whopping 147% and 131% respectively. Most recent investors will have bought Aviva with their eyes open, recognizing its heavy exposure to the toxic eurozone. They would have consoled themselves with the low valuation and fat 7%-plus yield, while they waited for the recovery to come. But their patience has been sorely stretched.
Business up, costs down
Many will have been revived by last week's statement, which showed new business up 18% by value to 191 million pounds, driven by improved profitability in U.K. Life and strong sales in Turkey and Asia. Aviva is on course to cut its operating costs, down 10% to 769 million pounds, a drop of 83 million pounds. Internal debt fell by 300 million pounds. Its balance sheet was buoyed by the sale of its remaining shareholding in Delta Lloyd, and disposal of businesses in Russia and Malaysia. It also received 608 million euros for the transfer of Aseval. Group CEO Mark Wilson said the results demonstrate "the first steps toward delivery," but warned against raising unrealistic expectations, and admitted Aviva needs to do a lot more for its shareholders (I can second that).
Aviva appears to have the right strategy, of dumping non-core or underperforming assets, scything out layers of middle management and boosting the group's financial cushion. There are still troubles ahead, especially in southern Europe, and its attempts to make up lost ground in Asia, while welcome, also show just how far it has been trailing its competitors.
The road is long...
Following the recent 44% cut, Aviva is no longer the fat yielder of yore. At 14.6 pence per share, it now yields around 4.3%. But that's still higher than the FTSE 100 average of 3.39%. Let's hope it holds. It still looks relatively cheap, trading at around eight times earnings, against 13.5 times for the index. Earnings per share (EPS) growth is forecast to hit 10% in 2014. Brokers are fairly bullish, Credit Suisse and JP Morgan Cazenove have just reiterated their "outperform" and "overweight" ratings, with target prices of 4.35 pounds and 3.93 pounds respectively. Right now, you can buy it for 3.49 pounds, below its 52-week high of 3.88 pounds. But don't expect instant results. Aviva is a company in recovery, but the road ahead is long and bumpy.
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