Aviva (LON: AV) (LSE: AV.L) is one of my favourite stocks. I’m very bullish about the company’s future and think that it could seriously enhance my retirement prospects. A key reason for that is the company’s strategy, which I think could drive its profitability higher in the coming years.
After the dark days of a few years back when Aviva made a loss, the current management team has done a sterling job of turning the business around. It has implemented various changes to its core operations and sought to drive down the company’s cost base and make it more efficient. It has also combined with Friends Life to create a major life insurance player which has a commanding position within that space. In my view, this could be a game changer.
That’s because Aviva now has greater market share than it had in the past and this could lead to higher profitability. As someone who loves dividends, it could also mean faster rises in my income in the coming years. That prospect is heightened by Aviva having what I consider to be a relatively low payout ratio. It currently stands at around 52% and I think this figure could move higher. That’s particularly the case if Aviva is able to increase its profitability and deliver on the synergies which were a key part of the rationale behind the takeover of Friends Life.
I’m also optimistic about Aviva’s prospects due to it trading on a P/E of less than 10. For a company with the market position, track record and profitability of Aviva, I consider this valuation to be rather low. Therefore, I think there is the potential for capital gains not only from Aviva having a more commanding position within the life insurance space, but also because of its relatively cheap share price.
Add to this a yield of 5.3% and I find it difficult to understand why the market is not more bullish about Aviva’s prospects. Perhaps other investors are more cautious regarding the combination with Friends Life – it is a big deal after all, or maybe they see higher interest rates as being a problem for insurers or for higher yielding stocks.
Either way, I’m disappointed that Aviva is still trading below 500p after it was higher than that level in recent years. But I’m optimistic about its long term prospects and its ability to aid me in my planned early retirement.
The author owns shares in Aviva at the time of writing.