AV (Aviva PLC): Insuring Some Alpha?
By: Travis Mantel, Student at Marquette University
Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.
• Aviva provides general and health insurance - and fund management products - worldwide. It has been creating synergies higher than expected from their acquisition of Friend’s Life three months into 2015.
• Aviva has increased their customer base by more than 20% from the beginning of 2014 due in large part to the acquisition. However, Aviva offers more products than Friends Life and has experienced a 45% increase in revenues propelled mostly by cross-selling to new customers.
• Management has indicated that they are forecasting to raise their dividend next year with estimates of a growth of 15.6%. Also, they have been using excess cash to buy back common stock from shareholders which should help push the stock to 52-week highs.
• The UK central bank is unlikely to raise interest rates within the next year which will help propel Aviva’s earnings in the next year.
Aviva PLC (NYSE:AV) remains a very strong company in a desecrated international financial sector. Since their CEO, Mark Wilson, has taken over, Aviva has been focused on increasing earnings through expense reduction and revenue growth. Mark thought Aviva was very inefficient when he came on in the beginning of 2013 and has combatted that with a series of expense reductions, specifically in operations. He has reduced SG&A expenses by a total of 19% over his two year tenure. Further, they have been pushing for growth in revenue base and have been able to achieve that with the acquisition of Friends Life.
Friends Life brought over a customer base of over 5 million. Cross selling to these new customers has increased underwriting profits by 45% this year. The synergies created from this acquisition are much larger than they initially anticipated. Six months since the acquisition they have produced run-rate synergies of £104 million when they initially anticipated three year synergies to equal £225 million. Very profitable acquisition that is working in Aviva’s favor.
Management has stated there will be an increase in their dividend over the next year by an estimate of 15.6%. They have also built up a cash reserve that they are using for a stock buyback, spending $887 million in 2014 and an estimated $867 million in 2015. These two initiatives are building great value for shareholders in Aviva.
Aviva is set up for a very successful few years ahead of them. UK is not anticipated to raise interest rates in the coming years. Their products look much more valuable during periods of zero interest rates and they are still able to create a spread on these products. Mark Wilson has set up Aviva to be more efficient and more profitable than ever.
What has the stock done lately?
Aviva’s stock has increased in value by just under 1% from the beginning of the year. The stock has risen to as high as $17.50 during the year, but analysts continue to forecast a future price target above $18.50 - it is currently at about $15. With response to beating EPS estimates and the news of a dividend increase, the stock has rallied from $13.25 to the current price. Large banks continue to have an overweight grade put on Aviva - including the likes of JPMorgan and Morgan Stanley.
Past Year Performance: Aviva has increased in value by 4% over the past year, but the stock is a huge bargain at this point with a low P/E ratio of 9.0. They have increased underwriting profits by 45% from Q3 of 2015 to Q3 of 2014 and are anticipating accelerated growth from the close to zero interest rates in the UK. Stock buybacks and a dividend increase will help grow shareholder value.
Aviva PLC has greatly increased their presence in the UK. Their new CEO has taken a very active role in Aviva and has been successful in creating a more efficient company while growing revenues. Friends Life is an acquisition that is benefiting Aviva more than anticipated through the use of cross selling to their new customer base. With a low interest rate environment Aviva will take advantage with attractive products while still making a spread on the investment. Aviva will be very profitable in the coming years and may be more profitable than anticipated if the Friends Life acquisition continues to overproduce. It is also an attractive investment with management continuing to give cash back to their shareholders through increasing dividends and share buybacks. This should be a stable stock, but also one that could add some alpha!