The FTSE 100 has gained 49% over the past five years but Aviva (LSE:AV.) shares have risen by around 70%. Add in the dividends, and the total return is even more impressive. So can Aviva repeat that performance over the next five years?
The momentum continues
Today’s (14 August) H1 results suggest the momentum hasn’t gone away. Group operating profit rose 24% to £1.3bn, while operating earnings per share increased 10% to 31.8p.
Cash generation was even more impressive. Cash remittances jumped 47% to almost £1.5bn, while the return on equity rose to 20.3%. That gives the company plenty of scope to keep investing in the business while also returning cash to shareholders.
There was growth across several business divisions. General insurance premiums rose 29%, helped by the Direct Line acquisition, while wealth net flows jumped 32% to £7.6bn. Assets under management have now reached £261bn.
The interim dividend increased by 7% to 14p per share. That puts it on a forward yield for 2026 of 5.9%.
More importantly for the longer-term story, management remains confident it can deliver 11% annual growth in operating earnings per share through to 2028.
That’s a pretty good starting point if you’re asking whether the next five years could resemble the last five.
What could drive the next half-decade?
The Direct Line deal is a major part of the ongoing growth story.
The integration is continuing at pace. All of its employees have transferred across, customer service remains strong and £100m of annual cost savings have already been delivered.
But for me, the more interesting opportunity is what happens beyond traditional insurance. The group is already majority capital-light, with Wealth becoming increasingly important to its future growth.
That matters because growing Wealth and other capital-light businesses should require less capital to generate additional profits. It also gives it another way to benefit from its huge base of 21.8m UK customers.
If management can combine that scale with the Direct Line integration and continued growth in Wealth, I think the business could look quite different in five years’ time.
The risks investors can’t control
There is, of course, another side to the story. Aviva can improve its businesses and still be caught out by the wider economy.
Insurance companies are particularly sensitive to what happens in bond markets. Higher yields can help in some areas, but sharp moves in interest rates can also put pressure on capital and investment returns. Inflation is another problem if it proves harder to bring under control.
That risk feels more relevant today. Government borrowing remains high and bond markets are having to absorb a huge amount of new debt. UK gilt yields have been rising, while rising energy prices could put fresh pressure on inflation.
None of this is an Aviva-specific problem. But that’s precisely the point. Even if management gets the strategy right, forces outside its control could make the next five years much harder than the last five.
I remain a shareholder, but after such a strong run I’m more neutral than bullish. The growth story remains compelling, although expectations are higher. For investors looking for a quality FTSE 100 income stock, Aviva remains one to cautiously consider.
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Andrew Mackie owns shares in Aviva.
This story originally appeared on Motley Fool
