UK Edition
Value investing has become increasingly popular over recent months. A less upbeat global economic outlook and rising interest rates have encouraged investors to switch from growth stocks that trade at high earnings multiples to companies whose shares offer wider margins of safety.
Investors who wish to follow the trend towards value stocks are not too late. Aviva, the diversified financial services business, currently trades on a price-to-earnings ratio of just 8.6.
Its shares have disappointed since this column decided that they were worth buying at 532p in June 2017: they have fallen by 19pc, while the FTSE 100 is flat over the same period.
However, the company has declared or paid 115.95p per share in dividends since that original recommendation. This amounts to about 22pc of the original purchase price. More importantly, Aviva has undergone a vast change under a new management team that led to the disposal of eight non-core businesses in its latest financial year.
This raised £7.5bn, which has been partly used to reduce the company’s debt so that it now stands £1.9bn lower than in 2020 and is within the firm’s target range.
In addition, the company has returned £1bn to shareholders via a recently completed share buyback. It now intends to return a further £3.8bn to investors via the issue of “B” shares. They will be issued on a one-for-one basis to holders of Aviva shares as at the close of business on May 13.
They will then be redeemed and cancelled by the company at a price of 101.69p on or around May 17 and the proceeds paid to shareholders within 10 business days.
Alongside the return of capital, Aviva plans to undertake a share consolidation to neutralise, in theory at least, the impact of a reduction in its net asset value on its share price. For every 100 existing shares investors will receive 76 “new shares”, which are expected to begin trading on May 16.
In Questor’s view, the company’s decision to sell assets en masse was logical. It creates a simpler business focused on its core markets of Britain, Ireland and Canada, where it has a more obvious competitive advantage over rivals.
It now intends to concentrate future investment on long-term growth opportunities, notably in the savings and retirement segment, where it reported record net inflows of money in its latest financial year. Investments in its digital capability, alongside bolt-on acquisitions, could further improve its market position. Meanwhile, an increased cost savings target of £750m to be achieved by 2024 is another positive sign.
Aviva’s stronger financial outlook means that its plan to raise dividends at a low-to-mid single-digit rate over the coming years is likely to become more realistic. When combined with its forecast dividend yield for the 2022 financial year of about 7pc, the company continues to offer a very attractive income outlook.
Clearly, selling non-core assets may prove to be easier than growing profits in the remaining operations. But in this column’s view Aviva is on a much improved trajectory now it is leaner and simpler. Given its low valuation, investors should keep buying.
Questor says: buy
Ticker: AV.
Share price at close: 428.9p
Update: Polymetal
Shares in Polymetal, the Russia and Kazakhstan-focused gold miner, have almost trebled following this column’s last update on the company on March 9.
Since then, the business has appointed a new management team following mass resignations in response to the war in Ukraine and has been excluded from FTSE indices (although its shares continue to trade on the London Stock Exchange).
Polymetal’s latest update stated that sanctions had thus far not had a material impact on its operations. We continue to view the stock as a hold given the company’s attractive portfolio of assets, but reiterate that it remains an extremely risky investment after its 78pc slump since our original recommendation in March 2020.
Of course, Questor has not considered the ethical aspect that, for many investors, will override any thoughts of owning a company that operates largely in Russia. Others should hold.
Questor says: hold
Ticker: POLY
Share price at close: 265.5p
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