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I think this FTSE 100 stock could beat the market in 2020

Rupert Hargreaves
Pen next to sheet of paper

Many FTSE 100 stocks are currently trading on low valuations and offer high dividend yields in comparison to the rest of the market. Buying just one or a basket of these companies could potentially generate high long-term returns, as well as a steady and growing passive income stream for investors.

A prime example of a FTSE 100 company that could be worth buying today is insurance giant Aviva (LSE: AV).

The company is currently facing a range of challenges that have tested investor patience with the firm. For example, for several months last year, Aviva was without a CEO. The previous manager was pushed out after a botched attempt to redeem the group’s high-yielding preference shares. It took a while to find a successor who had the skills and experience required to run the global insurance enterprise.

A new manager 

Maurice Tulloch, who has been at Aviva for several years, took on the role. The new manager has got a lot on his plate. Aviva is one of the largest insurance companies in the UK, but it has lost its way over the past few years. However, recent updates from the group have highlighted the changes being made to its business model.

The company is now planning to overhaul its corporate structure and improve profitability. Over the next three years, it is looking to generate £8.5bn to £9bn of cash flow and achieve a return on equity of 12%. There are also plans to reduce debt and reduce costs by cutting 1,800 jobs.

These initiatives will weigh on growth in the short term, but in the long term, such moves could prove to be sound.

Enhanced prospects 

Improved cash generation and lower costs should help stabilise Aviva’s financial position, as well as enhancing the prospects for shareholder returns.

Despite the publication of its growth plans, the company’s shares continue to trade on a low valuation. The stock has a price-to-earnings (P/E) ratio of just 7.2, which appears to suggest that the shares offer a wide margin of safety at current levels. A dividend yield of 7.5% only sweetens the deal for investors and suggests that the stock’s total return prospects could be high.

Looking ahead, Aviva could face further challenges, but it seems as if management has now got the company firmly under control.

It might take some time for the group to return to growth. However, the prospect of increased cash generation and a dividend yield of 7.5% indicates that investors will be well rewarded over the next few years as the insurance giant begins its turnaround.

As such, now could be a great time to snap up the stock at a discount price ahead of a recovery. Over the long run, the stock looks to offer value as well as a high-quality, growing passive income stream.

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Rupert Hargreaves owns no share 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