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Aviva’s share price falls 40%. Here’s why I’d still invest with dividends suspended

Matthew Dumigan
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On Wednesday, Aviva’s (LSE: AV) share price took another tumble as the UK insurers scrapped plans to pay dividends.

The announcement rubs further salt in the wounds of income investors, who have already been hurt by the UK banks agreeing to cease dividend pay-outs.

According to The Financial Times, British insurance companies RSA, Direct Line, and Hiscox have all agreed to suspend dividends alongside Aviva. This comes after pressure from the Bank of England in light of the impact of coronavirus on the economy. Only Legal & General confirmed it would push ahead with its pay-out.

So, with a falling share price and a suspension of dividends, things don’t look too good on the surface for Aviva. But here’s why I’d still invest in the FTSE 100 insurance stalwart.

Great value

First and foremost, I think Aviva’s current share price is great value. Since mid-February, it has shaved around 40% from its valuation. That’s substantially more than the near 25% drop in the value of the FTSE 100 index.

While a huge price drop doesn’t automatically entail good value, I don’t think this is the case for Aviva.

Shares are now trading on a price-to-earnings ratio of just 4.18, which to me indicates that the stock may be undervalued.

Remember that for that price, you’re getting a position in the UK’s largest general insurer. On top of this, Aviva is a market-leading pensions provider, with around 33 million customers across 16 different countries.

Ultimately, Aviva is a blue-chip insurance giant that won’t go under easily.

Strong financial position

For me, Aviva’s strong financial position only strengthens the case. In early March, the company posted record full-year profits, underscoring a successful year in 2019.

Although results will undoubtedly be weaker this year, the company maintains a strong balance sheet with healthy cash flows that should dampen the impact on earnings.

What’s more, the group has recently taken action to further reinforce its liquidity position.

As a result of suspending dividend payments, the company states it remains “well capitalised with strong liquidity”.

By scrapping the final dividend, Aviva estimates its group capital ratio will increase by around 7% to approximately 182%. That’s a healthy ratio, even in times of crisis, in my eyes.

A bright future for Aviva

Although it remains too early to determine the full impact of the coronavirus outbreak on business, I’m confident Aviva can weather the financial storm.

If so, investors can expect to be rewarded twofold as Aviva’s share price recovers and dividend payments start up again.

The company is known for its attractive dividend yield, which sat at 7.40% at the end of 2019. What’s more, Aviva successfully increased its dividend for the last six years.

With that in mind, Aviva’s share price looks like a bargain to me. Investors willing to stick with the group over the long term can expect the company to come out the other side in good shape.

The post Aviva’s share price falls 40%. Here’s why I’d still invest with dividends suspended appeared first on The Motley Fool UK.

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Matthew Dumigan 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.

Motley Fool UK 2020