CAPScall of the Week: Aviva

For years, satirical late-night TV host Stephen Colbert has been running a series on his show known as "Better Know a District," which highlights one of the 435 U.S. districts and its congressional representative. While I am no Stephen Colbert, I am brutally inquisitive when it comes to the 5,000-plus listed companies on the U.S. stock exchanges.

That's why this week and every week from here on out, I'll make it a tradition to examine one seldom-followed company within the Motley Fool CAPS database and make a CAPScall of outperform or underperform on that company.

For this week's round of what I'd like to call "Better Know a Stock," I'd like to take a closer look at U.K.-based insurer Aviva (NYS: AV) .

What Aviva does
Most of you probably haven't heard of Aviva, but with 43 million members, it is the largest life and general insurance provider in the United Kingdom. The company also has operations throughout Europe, the U.S., and Canada -- and it recently began serving Asia. Aviva generates revenue from its investment portfolio as well as on the insurance policies it underwrites.

Who it competes against
Just as with any business, the spread between success and failure in the insurance industry is separated in some cases by a few percentage points. For Aviva, that spread is determined by its combined operating ratio. In short, the COR is a measure of how profitable it is for an insurer to underwrite policies, with anything less than 100 being profitable. In Aviva's latest quarterly results, its COR came in at 96.8, with all regions showing growth -- aside from Europe's COR of 101%, which is actually a year-on-year improvement.

The most difficult challenge for Aviva is how exactly to generate growth in what is typically a low-growth industry that has been dominated by PR nightmares in recent years. American International Group (NYS: AIG) is only now recovering from its poor investing decisions a few years ago while other insurers like MetLife (NYS: MET) have been hammered by natural disasters.

Still, the industry is filled with predominantly stable businesses, and Aviva looks as if it fits right in among its peers:

Source: Morningstar. *P/E based on trailing-12-month earnings.

As you can see, the insurance sector gets little love from a book-value perspective. AIG is valued the most below book of this bunch, but it comes with its own set of problems stemming from the credit crisis in 2008. Similarly, Allianz reported a 46% decline in profits due to instability in European financial markets. Prudential Financial was one of the few insurers to buck the trend of falling profits and actually booked a near-tripling in net income on gains outside the U.S. (mostly stemming from Asia). Aviva's claim to fame is its double-digit dividend yield of 10%. While not guaranteed, it speaks to Aviva's shareholder-first commitment and strong history of profitability.

The call
After reviewing its prospects, I've chosen to make a long-term CAPScall of outperform on Aviva. The reason for the call stems from Aviva's strong growth in countries outside of the U.K., as well as the fact that the U.K. represents one of the most stable European environments -- perhaps one of the only economies that could weather an austerity-induced regional economic downturn. From Aviva's 126% operating income growth in Asia to its 15% jump in profits in the U.S. -- its third straight year of growth in the region -- the company looks to have solidified where its future growth will come from.

Although I can't assure that Aviva will always pay out a double-digit dividend yield, I am fairly certain it will continue to pay out more than its peers. With a dividend payback period under 10 years and trading well below book value, I feel Aviva has stable, long-term investment potential written all over it.

Just as I'm scouring the market for the next great stock, so is our team of analysts at Stock Advisor. They have the inside track on which stocks only the smartest investors are buying. Find out the names of these companies for free by clicking here.

At the time thisarticle was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He's a car insurance company's worst nightmare. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's there to protect your interests.

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