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What might the recent Aviva share price performance tell me as an investor?

Image source: Aviva plc
Image source: Aviva plc

Past performance is not necessarily a guide to what will happen in future, in the stock market as elsewhere. But learning how a business has been performing can provide useful information when assessing its current prospects.

Take Aviva (LSE: AV) as an example. By looking back at the drivers for the Aviva share price in the past few months, I think I could make a more informed decision on whether to add the insurer to my portfolio now.

Modest gain

Over the past year, the Aviva share price has moved up but only by 2%.

Still, that is better than the performance during that period of the benchmark FTSE 100 index of which Aviva is a constituent. It moved down 3%.

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That sort of price movement reflects the ‘steady as she goes’ nature of the insurance business, arguably. A mainstream insurance business might be expected to perform broadly in line with the economy.

But in fact that is an oversimplification. Fellow FTSE 100 insurer Admiral has gained 16% over the past year, for example. When investing, one needs to pay attention not only to the sector but also the specific company.

Last year, Aviva reported a loss. However, shifting asset prices make it hard to value insurance shares purely on the basis of earnings. The current share price means Aviva has a market capitalisation of £12.4bn. Compared to an operating profit of £0.7bn in the first half of its current financial year, that looks cheap to me.

Where things go from here

The Aviva of today is a different beast to a few years ago.

During that period, it sold off non-core businesses to focus on its main markets, notably the UK.

Has that put it in a better or worse position from an investment perspective?

The concentration on fewer markets has added some risk. If the UK insurance market runs into challenges – for example regulatory pressure to lower premium rates – that could be worse news for the Aviva share price than if the firm had a wider spread of business.

Overall, though, I think focussing on key markets with critical mass where the business has some right to win is a smart move. It means management can focus its attention where it can be most useful.

Aviva has a large customer base, strong brands, and understands the insurance business well. I see those as strong assets that set it up well for profitability over the long run.

The dividend yield of 7% is also attractive to me. I see prospects for ongoing growth in the shareholder payout. The interim dividend grew a healthy 8%. If business continues to go well, I reckon there is further scope for dividend increases over the next few years.

At the current Aviva share price, if I had spare cash to invest in March, I would be happy to add the company to my ISA.

The post What might the recent Aviva share price performance tell me as an investor? appeared first on The Motley Fool UK.

More reading

C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Admiral Group 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.

Motley Fool UK 2024