A 7.2% forecast yield and 35% under ‘fair value’, should I buy more Aviva shares after the strong trading update?

Aviva (LSE: AV) shares currently look very cheap to me on three key stock valuation measures I most trust.

On the price-to-sales ratio, they currently trade at just 0.7 – bottom of their group of competitors, which average 1.9. These firms comprise Legal & General at 1.2, Swiss Life Holding at 1.9, Admiral at 2.1, and Prudential at 2.4.

On the price-to-book ratio, Aviva is second bottom of the group (slightly above Prudential) at 1.9. Its peer group average is 4.

I ran a discounted cash flow (DCF) analysis to put these numbers into a share price context. This shows Aviva shares are 35% undervalued at their current £6.06 price.

Therefore, the fair value for them is £9.32, although they may trade lower or higher due to various market forces,

Consequently, this puts them firmly in bargain-basement buying territory for me.

What’s the story with the yield?

In 2024, Aviva paid a dividend of 35.7p, which gives a yield on the current share price of 5.9%.

That said, this payout moves up and down as share prices and annual dividends change.

Consensus analysts’ forecasts are that the firm will increase these to 37.9p this year, 40.7p next year and 43.9p in 2027. This would give respective yields of 6.3%, 6.7%, and 7.2% on the present share price.

By contrast, the current average yield of the FTSE 100 is 3.5% and of the FTSE 250 3.4%.

This again puts Aviva squarely in the mix of my high-yielding shares designed to maximise my annual passive income. This is money made with little effort from me, as with dividends paid by shares.

Seven percent or more is my yield requirement here as I can get 4.7% from the ‘risk-free rate’ (10-year UK government bond) and shares are not risk-free.

How much passive income could it generate?

Investors considering a holding of £11,000 – the average UK savings amount – in Aviva would make £8,815 in dividends after 10 years. After 30 years this would rise to £53,300.

These figures are based on the current 5.9% yield, with dividends being reinvested back into the stock – called ‘dividend compounding’.

If the yield rises to 7.2% as forecast, the 10-year dividend figure would be £13,228 and the 30-year figure £83,769.

Again these are based on the dividends being reinvested back into the stock.

Is the business growing?

A risk to the firm is another surge in the cost of living that may cause customers to cancel policies.

However, analysts forecast that Aviva’s earnings will increase a whopping 14.5% a year to the end of 2027. It is earnings growth that ultimately powers a firm’s share price and dividends higher long term.

Its Q1 results released on 15 May showed general insurance premiums up 9% year on year to £2.9bn. Retirement product sales rose 4% to £1.8bn. Meanwhile, sales of health and other protection packages (death, critical illness, loss of income) jumped 19% to £126m.

Its Solvency II cover ratio stayed way above the 100% industry standard – at 201%.

Given the strong core business, the undervalued share price and a projected rising yield I will buy more Aviva shares very soon.

The post A 7.2% forecast yield and 35% under ‘fair value’, should I buy more Aviva shares after the strong trading update? appeared first on The Motley Fool UK.

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Simon Watkins has positions in Admiral Group Plc, Aviva Plc, and Legal & General Group Plc. The Motley Fool UK has recommended Admiral Group Plc and Prudential Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.