Via Yahoo Finance

Shares in insurance group and long term savings manager Aviva (LSE: AV) look dirt cheap right now. Indeed, shares in the business are currently changing hands at a forward P/E of 6.8 and yield 7.8% — one of the highest dividend yields in the FTSE 100.

By comparison, the rest of the insurance industry is dealing at an average multiple of 11.3, which implies shares in Aviva could be undervalued by as much as 65% from current levels to hit the sector average.

When you add the company’s dividend yield of 7.8% into the equation, it is possible investors could see a total return of nearly 100% over the next few years.

The question I want to try and answer today is, can the Aviva share price really double your money or does the stock deserve its current valuation?

Changing of the guard

After an extended period without a CEO, Maurice Tulloch finally took over Aviva’s management in March. He has since been working flat out ever since to try to restore investor confidence in the business.

Tulloch has announced a cost-cutting plan and is working on the details of separating Aviva’s UK business into two divisions, general insurance and life insurance. This is part of his plan to “crack the complexity” of the Aviva group, which he believes has been holding the company back.

Tulloch is planning to slash costs by £300m, which is equivalent to around 10% of last year’s operating profit. That could mean a big jump in earnings for shareholders if the plan comes off without a hitch. 

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Still, at this point, the plan is only in its early stages, and we’ve yet to see any concrete results on either the cost reduction or simplification fronts. Over the next six-to-12 months, we should get some more information from the business detailing the progress made and further actions to be taken. Aviva usually publishes its annual report for the previous year around March. 

Profits rising

In my opinion, the performance of the Aviva share price hinges on the company’s restructuring. If the new CEO can successfully reduce group complexity and cut out unnecessary costs, a 10% increase in operating profit could push the stock higher by 10%, assuming all else remains equal.

If the restructuring does not unfold as envisaged, the Aviva share price could continue to languish at current levels. Nonetheless, even in this scenario, investors will still be entitled to that 7.8% dividend yield.

On that basis, I reckon the Aviva share price is likely to return a minimum of 7.8% over the next 12-months, and possibly 18% to 20% if profits receive a boost from cost-cutting efforts. If Tulloch and team successfully execute their restructuring plan, then it is also highly probable that the market will also award the stock a higher earnings multiple. Although, it is difficult to say with any certainty if this will really happen right now.

So overall, I think it is highly likely the Aviva share price will produce a positive return over the next 12 months. However, I reckon it is unlikely the stock will double your money.

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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 2019

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