Should I Buy Aviva?


LONDON -- It's time to go shopping for shares again, but where to start? Insurance titan Prudential? Rain-soaked retailer Kingfisher? Or dial-a-dividend behemoth Vodafone?

There are plenty of great stocks to choose from, and I'm enjoying doing some window shopping. So here's the question I'm asking right now. Should I buy Aviva (ISE: AV.L) (NYS: AV) ?

The joy of 8.1
Insurer Aviva has a cult following at the Fool, and with good reason. It's a big, solid company whose share price has been badly knocked by the eurozone crisis and looks ripe for a rerating.

Aviva's shareholders have had to be patient, because aside from the odd flicker, this sleeping behemoth has yet to spark back into life. I've been holding it for a couple of years without pocketing a penny in capital growth, but I'm not complaining, because I'm being paid very nicely to sit on my hands.

Aviva yields a mighty 8.1%, the third highest in the FTSE 100. I've got money in a savings account earning just 2%, and nobody is going to rerate that. Should I use it to buy more Aviva?

Viva Aviva
Aviva does 60% of its business in Europe, but it can't blame all of its woes on the stricken continent. The 10% drop in its operating profits in the first half of 2012 was largely due to a 876 million-pound writedown in its U.S. business, the sale of RAC, 40 million pounds of U.K. weather-related claims and adverse foreign exchange movements.

All that knocked the joie de vivre out of Aviva, which made a net loss of 681 million pounds after tax, compared with a 465 million-pound profit 12 months earlier.

The road to Rome
Chairman John McFarlane's predecessor, Andrew Moss, was hounded out by disgruntled shareholders in May, and McFarlane has been busily managing expectations by warning the second half of the year won't be much better. The good news is that Aviva held its fat dividend at 10 pence a share.

Aviva's share price shot up 15% to 3.63 pence over the following month, only to dip recently. There seems to be a pattern here. When there's hope of a eurozone bailout, the stock rises, but when protesters burn barricades in Athens and Madrid, it falls.

Patience is a virtue
I'm writing this on 1 October, the day auto-enrollment begins, which will give millions of British workers access to a workplace pension for the first time. That should be a great opportunity for Aviva.

On the downside, the insurer faces expensive restructuring costs, and Europe is going to get worse before it gets better. Aviva still holds 5 billion euros worth of Italian sovereign bonds. I thought you should know that.

Still, there's always that dividend. True, it is only covered 0.7 times, and may be raided to help boost Aviva's capital reserves, but just look at the size of it. Trading on a forecast price-to-earnings ratio of just 6.1 for December 2013, Aviva still looks a buy to me, especially on any further weakness. Just prepare to be patient.

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Harvey owns shares in Aviva, Prudential and Vodafone. He doesn't own shares in any other company mentioned in this article. The Motley Fool has recommended shares in Vodafone.

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