Over the last five years, Aviva (LSE:AV.) shares have been on fire, climbing by almost 130%! Under the new leadership of Amanda Blanc, the insurance giant has undergone a strategic refocus, which, when combined with the tailwinds of higher interest rates, has delivered strong financial results.
As such, any investor who put £1,000 to work at the start of her tenure in July 2020 is now sitting on an impressive £2,286.
However, with so much growth under its belt, can Aviva shares continue to climb higher? Let’s take a look.
Beating expectations
Under Blanc’s leadership, Aviva sold off its non-core international operations to refocus the company on three key markets: the UK, Ireland, and Canada.
This simplification has subsequently led to several efficiency gains and, in 2024, investors witnessed operating profits in the UK and Ireland skyrocket by 57% in the General Insurance segment. While its smaller operations in Canada didn’t fare as well, the overall results were a 20% jump in earnings, reaching £1,767m.
Skipping ahead to the first quarter of 2025, and this momentum’s continued. Subsequently, management’s projecting it will reach £2bn in annual operating income by 2026, along with £1.8bn in its Solvency II operating free capital generation. The latter’s particularly important since it represents the profits Aviva makes that can be used for reinvestment, dividends, and buybacks without eroding its regulatory safety buffers.
In other words, the already impressive 5.9% dividend yield (11th-highest in the FTSE 100) looks like it’s here to stay. And having just successfully acquired Direct Line, more impressive financial growth could be on the horizon.
What could go wrong?
At a price-to-earnings ratio of 26 and the stock trading near its 52-week high, Aviva shares can hardly be described as cheap. And with an average consensus analyst price target of 612p, it seems the firm’s future growth potential’s already largely baked into its valuation.
With that in mind, investors expecting more triple-digit growth on the horizon could be left disappointed. This is especially true if the Direct Line acquisition doesn’t perform as expected.
Institutional analysts have highlighted the £3.7bn deal as a critical catalyst for future growth, crucial for delivering £100m in annualised savings as well as boosting insurance margins to 13% by 2026. However, integrating a takeover of this scale’s no easy task. And unforeseen challenges could end up throwing a spanner into the works.
Another top concern is the rising cost of claims, with vehicle repairs in particular becoming increasingly expensive. This headwind could offset any gains made through efficiency improvements, harming profitability and potentially causing the company to fall short of its 2026 targets.
The bottom line
So are Aviva shares worth considering right now? While I’m sceptical investors will see the market cap double again in the near term, the long-term gains of a more dominant market position make me optimistic that good times lie ahead. There are obviously no guarantees, but the opportunity’s large enough for me to consider taking a deeper dive into this enterprise.
