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.
Summary
• 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.
My
Takeaway
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!
