Aviva, one of London’s historic companies with roots dating back to the 17th century, stands as the largest life insurer in Britain, commanding a substantial 23 percent market share and serving over 11 million customers with various insurance, wealth, or retirement policies.

The notable allure for investors lies in Aviva’s attractive 7 percent dividend yield, raising questions about the sustainability of this income source.

Founded from the merger of Norwich Union and CGU in 2000, Aviva has historically been favored in the market largely due to its dividend strategies. However, following Dame Amanda Blanc’s appointment as CEO in 2020, investor satisfaction waned due to stagnant share price growth that saw a total return of 85 percent from 2010 to 2020, underperforming the FTSE 100’s 113 percent.

Since then, Blanc has initiated a transformation of the company’s business model. Since 2021, Aviva exited markets such as Italy, Vietnam, France, Turkey, and Poland, along with a joint venture in Singapore, generating over £8 billion in proceeds—most of which has been directed back to shareholders through dividends or buybacks. Now, the company primarily focuses on operations in the UK, Ireland, and Canada, where it holds about 8 percent of the property and casualty insurance market.

Aviva is structured into three main segments: retirement, health, and insurance, with the majority of its profits stemming from retirement products like annuities. The company’s extensive scale enables effective cross-selling; nearly five million customers hold multiple Aviva policies, while 40 percent of new sales are to existing clients across individual and corporate sectors.

The Dividend Attraction

As one of the preferred income stocks in London, Aviva has delivered a 7.2 percent yield over the last year, positioning it near the top of the FTSE 100, which collectively yields 4.4 percent.

Despite a downturn in dividend cover— a ratio of earnings per share to dividends declared—due to recent earnings fluctuations, it remains above a multiple of 1. The company is positioned to capitalize on its investment portfolios, particularly bonds and mortgages, where rising interest rates have positively impacted its financial resources. Aviva’s Solvency II ratio, a crucial benchmark for insurers, reported 205 percent at the end of June, well above the desirable threshold of 180 percent.

Moreover, its return on equity has shown improvement, ending the first half of the year at 12.4 percent, an increase from 11.5 percent a year prior.

Blanc’s strategy aims to elevate the annual dividend by mid to single digits while advancing the next phase of the company’s rejuvenation through capital-light growth, emphasizing its wealth management, health, protection, and general insurance operations. With about £180 billion in assets under management, the wealth division is increasingly winning corporate pension mandates, having added 470 new schemes last year.

The target to boost operating profits in this sector from £100 million last year to £280 million by 2027 appears realistic. Overall, Aviva aspires for its capital-light segments to contribute 70 percent of a planned £2 billion operating profit by 2026, rising from 55 percent reported at the end of June.

Additionally, the company’s health insurance and protection product growth will benefit from demographic shifts and rising demand for private medical services, as evident in the 1.2 million UK residents currently accessing Aviva’s private medical services—a rise of over 100,000 from the previous year.

Recently, Aviva also acquired the insurance platform Probitas for £242 million, enabling re-entry into the Lloyd’s of London market, known for handling specialized risks.

If Aviva successfully enhances these capital-light areas, a correspondingly higher return on equity is anticipated, potentially climbing from about 15 percent at the close of last year to 19 percent by 2026. This growth should subsequently bolster profits, expand cash buffers, and facilitate increased dividends for shareholders.

Assessing The Valuation

Although Aviva does not hold the title of the highest-yielding insurer in London—Legal & General is projected to yield around 9 percent—it is trading at a minor discount relative to some competitors on a price-to-book basis, which contrasts market value to book value (total assets minus liabilities). Currently, Aviva shares are at a ratio of 1.6, compared to Legal & General at 3.9, Allianz at 2.1, and AXA at 1.8.

This price discount raises the possibility of future acquisition interest; rumors surfaced late last year regarding potential takeover considerations, including inquiries from Allianz.

Prospective acquirers may find much to appreciate in Aviva. Achieving a targeted annual operating profit growth of 11 percent, while ambitious, appears to be on track, as evidenced by the recent half-year report displaying a 14 percent increase in adjusted operating profit to £875 million, surpassing expectations.

This analysis had previously rated Aviva as a buy in the spring of the previous year. Since then, the shares have appreciated, delivering a 36 percent total return—substantially exceeding the FTSE 100’s 15 percent return. Given its leading market position, diverse offerings, and solid growth trajectory supporting dividend increases, Aviva shares may still be undervalued.

Advice: Buy

Conclusion: Shares appear undervalued in light of an optimized model and clear growth pathway.