The last three years have been epic for Aviva (LSE:AV.) shareholders, with the share price surging by roughly 77%, reaching its highest level since 2007.
While it’s always fun to celebrate market-beating returns, the rapid rise in valuation does beg an important question: can the Aviva share price continue to climb from here?
After all, the shares are now trading near a 20-year high, and the price-to-earnings ratio now sits at a whopping 41.8. So is there much fuel left in this multi-year rally?
Let’s explore.
Expensive or misunderstood?
At first glance, a P/E of 41.8 looks pretty chunky for a life insurance and financial services company. However, this figure’s a little misleading by itself.
Why? Because recent earnings have been weighed down by some short-term expenses. And when looking ahead to the group’s anticipated earnings, the forward P/E ratio looks far more reasonable at 13.3.
This anticipated boost in earnings also helps explain why, even after a dramatic rise, the latest share price targets from City analysts are looking pretty bullish.
Case in point, UBS has just hiked its price target from 720p to 780p, signalling that another 9% of capital gains could be on the table, not to mention the extra 5.6% coming from dividends. And a big factor behind this optimistic outlook is Direct Line.
The acquisition effect
While Aviva’s takeover of Direct Line was far from cheap, so far the acquisition is looking like a bit of a genius move. Integration efforts have largely stayed on track with no major delays or unexpected interruptions. And with synergies materialising in timely fashion, the company’s seemingly comfortably on track to hit its longer-term targets.
For reference, between 2025 and 2028, leadership is aiming to deliver an annual average growth of 11% in operating earnings per share, while simultaneously delivering £7bn in cash remittances. That latter figure’s particularly exciting given it’s what ultimately funds both Aviva’s dividends and share buybacks.
However, while things are seemingly going well here in the UK, the group’s performance internationally has been a bit more shaky.
What’s going on in Canada?
Despite disciplined underwriting, Aviva has nonetheless encountered a few headwinds in its Canadian business of late.
Following a fairly drastic shift in weather patterns, Canada’s been hit by quite a few storms, including severe flash flooding and wildfires. As such, Aviva has suffered much higher than expected catastrophe losses. And it doesn’t help that the local commercial insurance market has also started to soften at the same time.
Bigger-than-expected insurance costs are a standard part of running an insurance business. And fortunately none of these issues on their own is serious enough to derail the firm’s current trajectory.
Nevertheless, if Canadian softness proves persistent and Direct Line’s boost starts to fade, the bullish price targets might indeed prove to be a bit too optimistic.
So have we seen the top?
There’s no denying that the Aviva share price has been on a fantastic run. And with profits still expected to climb even with some international hiccups, I don’t think the rally’s over just yet.
That’s why, for investors seeking exposure to the insurance sector, I think Aviva could be worth a closer look.
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Zaven Boyrazian does not hold any positions in the companies mentioned.
This story originally appeared on Motley Fool
