Insurance company Aviva (LSE: AV) looks like a possible deal right now. Aviva’s share price-to-earnings (P/E) ratio is only 9.
If I see a blue-chip company with a P/E ratio in the single digits, it can grab my attention. But that’s only one valuation metric, so as an investor it’s important to have a well-rounded view of a company’s valuation.
The benefits are not the same
First, what is that P/E ratio based on?
Last year, Aviva’s basic earnings per share came in at 37.7p. But in the previous year, the company recorded negative core earnings per share of 34.7p. The year before that was good, but at 5.85p, it was well below what was achieved last year. Obviously, Aviva’s earnings can fluctuate significantly, meaning the P/E ratio may be a less useful valuation tool here than it would be for other companies.
As an insurance company, differences in underwriting results from one year to the next can impact earnings. For example, there may be an unusually damaging storm. Additionally, changes in the amount of investment by the insurance company can also affect the profit in any given year.
However, in the long run, I am optimistic about Aviva’s commercial outlook. Demand for insurance is likely to remain high, its brands are well known, it has a customer base approaching 20m (about 5m British customers have multiple policies with the firm) and increased focus on core markets in recent years has helped to control the spread of the past. business.
There’s a lot to like, but also some risks
The business still has no money but it is a powerful money making machine. In the first half of this year, for example, it made an operating profit of £875m. General insurance premiums over the six-month period were more than £6bn.
Aviva has split its dividend in the past few years but has been growing it again.
Interim pay grew by 7%. The dividend yield now stands at 7.4%, which is blue-chip FTSE 100 a business like this, I find attractive.
Insurance is a tough business, however, and there are always risks, just like a competitor Straight LineA very mixed performance in the last few years has been shown.
Premium prices have gone up a lot in the UK and Ireland in recent years. That worked to the benefit of the underwriters, but I also see scope for downward movement, if one company tries to win business by being more competitive on price. Given the importance of the UK market to Aviva’s overall performance, I see that as a risk for the company.
But I think investors should consider working at Aviva’s current price. I think it represents a good deal for a company with a long runway, a proven business model, open dividends, and a focused business strategy.
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