Often, the most profitable investments are turnaround stocks. Those companies that are trading on low valuations and that require a significant amount of management input to turn their bottom lines around.
Of course, such stocks inevitably comes with greater risk than steadier, more stable peers. But they also come with greater potential reward, too.
It seems a long time ago that Aviva slashed its dividend in response to a number of challenging years that saw profit turn into a loss in 2012. In fact, it was only 18 months ago and in that time the insurer has moved from strength to strength. For example, it is forecast to post earnings per share (EPS) in the current year that are the highest in recent history.
Indeed, Avivas turnaround has been successful thus far as a result of decisive action taken by new management. As mentioned, they slashed the dividend and made the companys prospects, rather than shareholders income, their main focus. They aimed to make Aviva more efficient, smaller and, ultimately, far more profitable. They are in the process of achieving this through the sale of non-core businesses that offer a relatively unattractive risk/reward ratio.
Evidence of their success can be seen in the forecasts over the next couple of years for Aviva. Not only is the company due to deliver hugely impressive levels of profitability in the current year, EPS is expected to rise by 9% next year. If met, this will allow the company to increase its dividends per share and the market is currently pencilling in growth of 15.8% next year. That puts Aviva on a forward dividend yield of 3.7%, which is attractive given the companys strong dividend growth prospects.
With the new strategy delivering improved numbers, market sentiment has picked up considerably. Shares in Aviva have risen by 31% over the last year alone (30% more than the FTSE 100 has managed), but there could be much more to come.
Thats because Aviva still trades on a relatively attractive valuation. For example, shares in the company trade on a price to earnings (P/E) ratio of just 11.1, which equates to a price to earnings growth (PEG) ratio of 1.2 when next years earnings growth potential is taken into account.
This shows that, while the turnaround plan is well underway, there could be further share price growth to come. As a result, Aviva could make a positive contribution to your retirement plans and help you to enjoy a more abundant retirement.
Of course, Aviva alone is unlikely to make you retire rich. So, which other shares should you buy, and why?
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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.