Will the Aviva share price reach £10? Here’s what needs to happen
The last five years have been phenomenal for the Aviva (LSE:AV.) share price. The insurance giant leveraged higher interest rates to propel its earnings. And the result has been a near-120% surge in its market-cap since July 2020.
Looking at analyst forecasts, the most optimistic prediction over the next 12 months is that Aviva shares could reach as high as £7. But when looking beyond a single year, a path to £10 may exist if the company can hit certain milestones.
Long-term potential
For the Aviva share price to reach £10, the £19bn business needs to expand into a £30bn one. Needless to say, building shareholder value on this scale is no easy feat. But now that the company has successfully completed its takeover of Direct Line, management could use this as a powerful catalyst.
Of course, thatâs dependent on the deal actually delivering on expectations. If everything goes smoothly, the company anticipates:
- An additional £125m in revenue from product cross-selling
- £125m in annual cost savings within three years
- 70% of operating profits originating from capital-light operations (up from 56% today)
- A 13% net insurance margin by 2026
The addition of Direct Line also gives Aviva control of roughly 20% of the UK motor insurance market and 17% of the wider property insurance market, granting significant economies of scale. After all, the more premiums it issues, the wider it can spread its risk and offer more competitively-priced policies. Â
But is that enough to build £11bn of shareholder value?
Crunching the numbers
As of the first quarter of 2025, the firmâs combined ratio stands at 96.6%. That implies a net insurance margin of 3.4%. And if management isnât being overly ambitious with boosting this to 13% by the end of next year, then based on current insurance revenue projects, Avivaâs earnings could potentially double as a result.
Of course, thatâs all dependent on the Direct Line acquisition going off without a hitch. And historically, acquisitions of this scale have rarely ended up as a completely smooth process. Even if there are no delays in integrating and cross-selling insurance products to its new customer base, the expected cost-saving synergies may simply fail to materialise.
The bottom line
A doubling of profits certainly paves the way for a near-doubling of share price if Aviva can maintain these gains in the long run. However, this potential may already be partially baked into the share price. After all, the insurance stock’s currently trading at a price-to-earnings ratio of 27.
In other words, the success of Direct Line alone likely wonât be sufficient to push the Aviva share price to £10. Instead, the company will have to continue expanding its market share and earnings to hit this milestone. And that could take several years, at least.
Nevertheless, given the potential, this could be an opportunity worth taking a closer look at for patient long-term investors.
The post Will the Aviva share price reach £10? Hereâs what needs to happen appeared first on The Motley Fool UK.
More reading
- Investors could target £6,531 in annual dividend income from £11,000 in this FTSE 100 financial giant. It looks very undervalued too!
- How much does someone need to invest to target a second income of £15k â or £150k?
- If investors had bought £1,000 worth of Aviva shares 5 years ago, here’s how much they’d have madeâ¦
- 2 soaring dividend shares to consider for both growth and income!
- Hereâs how a £20k ISA could earn £1,400 in passive income next year â and every year
Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.
