The Aviva (LSE: AV) share price has been grinding lower for years, but lately it’s been showing signs of life. Is now the time to buy before it climbs higher?
Aviva shares have fallen 15.81% over the last five years. The rate of fall has slowed lately, but they are still down 4.22% over 12 months. That might suggest a company in decline, but I don’t see it like that. It’s more like a company operating in an out-of-favour sector. Its nearest rival, Legal & General Group, is showing a similar trajectory. It’s down 15.02% over five years and 7.06% over one year.
Both stocks offer brilliant income as a result, with Aviva yielding 8.23% and L&G paying 8.68%. I’ve already made my mind up about L&G. I decided it was a no-brainer buy, and bought it twice in the summer. I haven’t bought Aviva, though. Is now the time to dive in?
The yield looks built to last
The Aviva share price is up 6% in the last month, but I hardly think I’ve missed my opportunity. There’s plenty more scope for growth quite aside from the yield, which is expected to hit 8.89% in 2024. That’s a dizzying rate of income, but is it sustainable?
Dividend cover is thin at just 1.3 times earnings for 2023, some way below the two times seen as ideal. Cover has been thin for a while, though, and Aviva’s dividends have kept on coming.
In fact, the board recently lifted the dividend per share by 8% to 11.1p, after first-half operating profit jumped 8% to £715m. It now expects full-year 2023 group operating profit to increase between 5% and 7% from last year’s £1.35bn.
The group’s wealth and retirement operations should do better once investor sentiment stabilises and markets start to recover. I would pin the recent jump in its share price down to the Bank of England’s surprise decision to hold base rates in September, amid a general feeling that they have now peaked, at least in the UK.
Shouldn’t they be doing better?
Aviva has also been making a splash in bulk purchase annuities, as more pension schemes look to mitigate risks. Plus it has diversification through general insurance, where first-half premiums rose 12% to £5.27bn despite today’s tough motor market.
I can see plenty of reasons to buy Aviva shares but I also have to ask myself this. If they’re so great, why isn’t everybody after them? One factor may be that global investors are down on the UK market generally. Personally, I think the gloom has been overdone.
Investors have also been chasing whizzy growth stocks, particularly US tech, although that trend seems to have run its course. Some investors now prefer bonds to shares as yields hit 6% with less risk. I don’t share their excitement.
I think Aviva’s sky-high yield is much more attractive. Once interest rates peak and retreat, those bond yields will fall while Aviva’s dividend may carry on climbing. At the same time, its share price may finally put on a spurt. Having applied my brain to the task, I’d happily buy Aviva today.
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Harvey Jones has positions in Legal & General Group Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
