2014 has been nothing short of superb for investors in Aviva (LSE: AV) (NYSE: AV.US). Indeed, shares in the insurer have surged by 18% since the turn of the year, easily beating the FTSE 100s lacklustre performance that has seen it fall by 0.5% year-to-date.
However, does this strong share price performance now mean that Aviva is overvalued and, as a result, will underperform the FTSE 100 moving forward? Or, can Aviva beat the FTSE 100 in 2015?
Despite its excellent share price performance in 2014, Aviva does not appear to be overvalued. For example, it trades on a price to earnings (P/E) ratio of 11.4, which seems to be relatively attractive while the FTSE 100 has a P/E ratio of 15.3. This means that investors are still rather cautious when it comes to Avivas future prospects, with its turnaround strategy clearly not convincing all investors that it will result in sustained profitability growth. As a consequence, there remains significant scope for an upward rerating to Avivas valuation in 2015.
Historically, Aviva has been viewed as an obvious choice for income seeking investors. However, after slashing its dividend in March 2013, yield-hunters have been left somewhat disappointed and, after its share price gains in recent months, Aviva now yields just 3.1%. Thats lower than the FTSE 100s yield of 3.3% and, as such, does not hold out a major appeal for income investors.
However, with Avivas bottom line now in a much healthier state than it was eighteen months ago, it can afford to increase dividends at a brisk pace. For example, Aviva is forecast to bump up next years dividend by 14.6%, which is a hugely attractive growth rate and means that the company could be yielding as much as 3.6% as soon as next year. And, with earnings set to grow by 6% next year and to further rise at a brisk pace in 2016 and beyond, Avivas appeal as a dividend play could rise substantially over the medium term and help to improve sentiment in the stock moving forward.
Clearly, the success of Avivas turnaround plan, where it has rationalised the business, generated efficiencies and streamlined its operations, has caused its performance to improve significantly in a relatively short space of time. Indeed, the disappointing year of 2012 (where Aviva made a loss) seems like a distant memory and the company is now in much healthier shape than it once was.
Furthermore, with there being significant scope for an upward adjustment to its rating, Avivas share price could continue to rise in 2015. Certainly, the rapidly growing dividend and the success of its turnaround are clearly causing investors to bid up the price of the companys shares, with this situation likely to continue next year as Aviva makes further progress under its present management team. As a result, Aviva could beat the FTSE 100 in 2015, just as it has done in 2014.
While that may be the case, finding stocks that beat the index (such as Aviva) can be a challenging task. Here at The Motley Fool, we believe that a step-by-step process can be the most successful means of unearthing the index-beating companies that could boost your portfolio returns.
In fact, we’ve written a free and without obligation guide called 10 Steps To Making A Million In The Market, which could make 2015 an even better year for your investments. It’s simple, straightforward and could help you to maximise the returns on your investments in the year ahead.
Click here to obtain your copy of the guide – it’s completely free and comes without any further obligation.
Peter Stephens owns shares of Aviva. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.