Shareholders ofAviva(LSE: AV) have had a rough ride over the past ten years. The company was hit hard by the financialcrisis. These troubles were compounded only a few years later when the 2011 Eurozone crisis forced Aviva to book hefty losses.
Indeed, Avivas pre-tax profit slumped from just under 2bn for 2010, to 373m for 2011 and 390m for 2012. On a per-share basis, Aviva reported a loss of 11.2p for 2011.
These losses pushed Aviva to begin a rigorous restructuring programme. Management slashed the companys dividend to save cash, cut jobs and refocused the business on its core assets.
So far, Avivas restructuring plan is bearing fruit. The group has seen the value of new business rocket over the past year, with managements renewed focus on emerging markets paying off.
During the 12months to the end of October last year, the value of Avivas new business jumped by 15%. New business growth in Europe and Asia was reported at 40% and 47% respectively for the period.
Avivas growth has continued into the first quarter of this year. The value of new business jumped by 14% year on year, with UK life insurance leading the charge.
And now, Aviva is about to embark on a new stage of its recovery as it starts to integrate the newly acquired Friends Life into the Aviva group.
Aviva announced its intention to acquire Friends following the changes to the UKs pension regime, which came into force earlier this year.
With sales of annuities now falling at an alarming rate, Aviva has decided that scale is the only way to survive in an increasingly competitive market. When the integration is complete, Aviva-Friends will be the UKs largest annuity provider.
Aviva believes that it can drive 225m a year in cost saving synergiesonce it acquires Friends. There will also be increased benefits to customers as synergies flow through. Also, the enlarged group should help Aviva to cross-sell products across the enlarged customer base.
Merger and integration costs for the two entities are set to total 350m, of which 200m will be incurred next year.
Unfortunately, according to current forecasts, it will take just over a year for Aviva to complete its integration with Friends and during the period, investors are unlikely to see any significant benefits from the deal.
However, by year-end City analysts believe that the integration process will be complete and benefits will start to shine through. Avivas earnings per share are expected to fall by 5% this year, before rebounding by 12% during 2016. EPS growth of 15% is expected for 2017.
Based on forecasts for growth, Aviva looks to be undervalued in comparison to its peers. The company is currently trading at a 2016 P/E of 9.6, compared to its international peers, which are trading at an average P/E of around 13.
Analysts forecast that Aviva will offer a dividend yield of 5.3% during 2017 up from the current yield of 3.2%. Further, if Aviva decides to up its payout ratio to 100%, the companys dividend yield could hit 7.3% by 2017. This figure is based on current cash-generation forecasts.
Your own research
So all in all, Aviva looks undervalued at present levels, and the company’s earnings are set to grow at a double-digit rate per annum from 2016 onwards.
Still, before you buy Aviva,I strongly recommend that you do your own research — you may come to a different conclusion.
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