Right, that’s Turkey and Mince Pies done, now we move onto boring old Insurance…yawn…
Again, I will try to only do a short Blog (yeah, right Wheelie, you don’t know the meaning of the word ‘short’…) with an Overview of the Key Fundamental Points for my Buy and a look at Valuations, Targets and Charts.
Luckily there is still some fuel in the WheelieCopter after our flight over Major Oil so no need to fill up for a visit to Norwich……..(The Quiz of the Week?….Younger readers have every right to be confused now.)
To set the scene, Aviva is a huge Life and General Insurance Company - it is very similar to Prudential PRU but arguably has failed Strategically because it has not made the move into the high growth markets of Asia that PRU has so successfully captured. Aviva used to be known as ‘Norwich Union’ but I think it has now dropped that brand entirely. I don’t remember the full history (not even sure I really knew it) but Aviva got in some difficulties in recent years and is in the process of a Turnaround (a favourite ‘Investing Theme’ for me) - it clearly found the Credit Crunch tough (who didn’t?).
- Aviva gained a new CEO a couple of years ago from Australia called Mark Wilson. I find this chap extremely impressive - one thing I particularly like is that in every Trading Update, he is clearly trying to play down Expectations and keep things sensible - this is great - it means Expectations can regularly be beaten - this can drive the Share Price up.
- One of the first things Mark Wilson did was to have a thorough Strategic Review of the Company and this identified something crazy like 47 Businesses in total around the World. Then, he determined which Businesses to keep, which ones to ditch and which ones to invest in and sort out. I love actions like this in a Turnaround Situation - the old Aviva was clearly a very bloated and inefficient mess with lots of Inter-company Loans and such silliness - Mark Wilson is sorting this out. I guess it’s one of those circumstances where existing Management within the Business were unable (or unwilling due to internal politics) to see the problems objectively, but for an Outsider like Mark Wilson, he can see the blindingly obvious and take some bold actions with the Strategic sprawl and get chopping.
- AV. is a nice Proxy for the FTSE100. Similarly as to why I bought RDSB, I wanted a bit more Long Exposure in anticipation of a Santa Rally and after the FTSE100 got so beaten up in the last couple of weeks, I wanted to play the rebound. However, I have way too many stocks in total and I need to shed some - so rather than buy New Positions, I just wanted to top up on a couple I already had where I could see Value and the Charts were telling me it was a good time to make my move.
- I guess this is one of the Major Risks of a Life Insurance type stock - they are amazing Proxies for the FTSE100. This has the drawback that if we have a slump in the Markets, then AV. will get hit hard. In fact, there are several Sectors that I tend to avoid for this very reason - Sharedealing Brokerages are a good example - stuff like Cenkos, Panmure, WH Ireland etc. I tend to rarely invest in such things as they are merely replicating exposures to Stocks which I already have. It is important to think of all Potential New Buys within your overall Portfolio Context - what does the New Buy bring to the Party?
- Compared to Prudential, Aviva seems pretty attractive - OK, it doesn’t have the growth element, but it is very good value for a turnaround situation and there is the outside possibility that PRU may bid for AV. - it has been rumoured a lot in the past.
- Aviva has just launched a Takeover Approach for Friends Life FLG, which looks like it will happen. When I first read about this I was not overly impressed, but having now read more on it, maybe it is not so bad. The big advantage is that FLG is highly Cash Generative and it should enable Aviva to pay higher Divvys - you will never hear me complain about that !! It does seem a rather strange move in light of the Strategic Decision to shed peripheral Businesses, but I have to trust Mark Wilson because his record so far has been very impressive.
- I have done really well on Aviva and bought loads on the way up - but around September I trimmed my Holding a bit, so now I am effectively just buying that back to some extent.
I am taking these figures from ShareScope as usual and assuming that they incorporate some allowance for the Friends Life combination - I think they must do as there tends to be no Forecasts once a Bid is announced and then the numbers appear a few days later.
For 2014, 2015 and 2016, the Forecast EPS (Earnings Per Share) are 48.69p, 49.08 and 53.19p.
On my Buy Price of 487.47p on Friday 19th Dec 2014, this means Forward P/E Ratios (Share Price divided by Earnings Per Share) for 2014, 2015 and 2016 of 10.0, 9.9 and 9.2.
The usual logic follows that a P/E of 10 or less is good value, so this seems pretty fair. In fact, compared with PRU on a P/E of about 15 this looks on the Cheap side - bear in mind that the Turnaround and Conservative Approach will possibly mean that Forecasts get beaten - more Potential Upside for the Share Price !!
The Forecast Dividend Payouts per Share for 2014, 2015 and 2016 are 18.09p, 20.95p and 25.79p.
So, at my Buy Price of 487.47p, the projected Dividend Yields for 2014, 2015 and 2016 are 3.7%, 4.3% and 5.3%.
I think you will agree that these look like tasty Dividend Streams to pick up whilst my favourite Aussie (obviously excluding Casey Stoner, Troy Bayliss and Mick Doohan) sorts the Business out.
I really think Aviva is very under-rated and with continued progress on the Strategic Mess, I think a much higher P/E could be justified and the Share Price would also get a boost if EPS can rise faster than forecast - with Mark Wilson’s apparent deliberate policy to downplay expectations, I think we could see the best of both worlds. This means EPS rising and P/E expansion - this could really kick the Share Price a lot higher.
Let’s assume that the Forecasts are right and they do not get beaten (a sensible, conservative approach). On that basis, I think a P/E of 14 would be pretty fair, and arguably on the low side. Based on 49.08p of EPS for 2015, this would mean a Target of 687p.
I don’t think it would take much imagination to see a slight beat on the EPS and a P/E of 15 - on this basis, I am targeting 750p. It may take a few years, but I am patient and will be picking up those sizeable divvys - and maybe these will come in higher with the FLG acquisition.
If you go back to 2008, the Shares were up at 850p - this is a pretty Strong Resistance Level on the Charts and I suspect that it would be a major hurdle for the Share Price and probably it will be many, many, years before it can breach this. For now, I am happy with my target of 750p and the outlier of a bid from Prudential might enable more to be gained.
Technical Analysis side of things
There are quite a few charts here - I won’t dwell on them, I will just point out the key bits. Please bear in mind that these Charts are from Thursday 18th December 2014 - I wanted to show you the prevailing situation when I made my decision to Buy.
Sideways Range Trader
In a manner reminiscent of RDSB, AV. Seems to be in a Sideways Range. Look at the Chart below - on the Right Hand Side you should see how the Share Price was clearly in an Uptrend Channel which it followed very nicely up until about August 2014 when it started to go Sideways. The Blue Horizontal lines indicate the Sideways Range which I think the Share Price has now settled in to for a while.
While we are on this chart, just look higher up at the Blue Wiggly Line - this is the Sector Line for ‘FTSE350 Life Insurance’ and clearly shows how AV. Has underperformed - some of this is probably because PRU has been so good and it has a large weighting in the Sector Index.
Another point to consider here, is that the Upmove and subsequent Sideways move could be viewed as a Long Term ‘Bull Flag’. I have talked about this stuff before - but think of a Flagpole with a Flag billowing out in the breeze……
The Upmove represents the ‘Pole’ and the Sideways bit is the ‘Flag’. The underlying TA logic here is that Bull Flags tend to point to more Gains to come. In other words, the Share Price moves up strongly first off, then it ‘consolidates’ in a sideways range, and at some point it will most likely ‘Breakout’ from the range and shoot up again. It is amazing how often this works - I would say probably as much as 80% reliable - but that is just me guessing, not a Scientific Academic Study (no doubt there will be plenty of those as ‘experts’ love doing this sort of ‘another planet’ exercise - which you can almost guarantee will be of no actual use to us Real World Investors !!).
The other interesting and appealing bit of a Bull Flag is that the next Breakout Move up will be as high as the ‘Flagpole’. In this case, that could mean an Upside of about 200p on top of any Breakout - this could mean a Price Level of 750p - notably consistent with my Fundamental Targeting.
Right, now look at the Chart below, particularly at recent days. and the Arrows I have marked in. The Blue Arrow is pointing to a Daily Candle with a Long Tail (or Wick) down. In the Context of the Down Move from about 3 weeks before, this is a significant Candle because it indicates that the Short Term Trend may be coming to an end as we have had a clear Intraday Reversal where the Bulls have taken control from the Bears. I would like to have seen a nicer Candle, like a Dragonfly sort of thing or a better Hammer with a smaller ‘body’ - but this seems to have done the trick.
The way to trade these things is not to jump the gun - wait for the next day to ‘Confirm’ the change of direction before you put a trade on. Some traders will make their move as soon as the Change of Direction is Confirmed intraday, but I prefer to leave it another day and see what Candle is formed to be sure we are really at the start of a new move up. I guess it is the difference between a Short Term ‘Daytrading’ or ‘Position Trading’ type approach as opposed to my Longer Term, Lazy, Inactive, Relaxed, Do as Little as Possible or Less, Approach………….
The Black Arrow, I have put in, points to a ‘Gap’; this is where the Bulls are so rampant that the Share Price has jumped up at the Open to the Day - it has ‘Gapped Up’ and is a pretty Bullish sign. It is worth noting though, that ‘Nature abhors a Vacuum’ so you normally find that within a few weeks maybe, the Gap gets ‘filled’ as the shares retrace and fill in the space. Weird, but it happens so often.
Nothing more to see here, move along please……….
On the Chart below, I have squeezed up the Top Window so we can focus on the Momentum Window at the bottom. Not much to see really, just look at the Red Arrow and note that it is down at the bottom of the Range within which the Indicator wobbles - and it seems to be moving up off the floor now - Bully Beef !!
Please look at the Bottom Window in the Chart below. Note the Black Arrow - similarly to the Momentum Chart above, this shows the RSI is moving up from the Floor - this is a move with Horns, not Claws.
The Top Window of the Chart below shows that the Candles have moved up from the bottom Blue Wiggly Bollinger Band. This is a Bullish Sign. If you cast your eyes to the Left, you will see where this has occurred before.
In the Bottom Window of the Chart above, you will see I have put a sort of Mauvey, Pinky, Purply, I don’t know what flippin’ colour it is, Arrow which is pointing to the Continuous Blue MACD Line sort of turning up - combined with the Red Histograms above, it looks like these are turning up. This is inconclusive really at this stage - it’s a matter of timing - MACD is a bit later than other Indicators I use like Candles, Momentum and RSI (feeling HOT, HOT, HOT?…)
I like the Weekly Candles because they give amazingly clear signals when viewed form Week to Week. In this case, I have jumped the gun a bit as when I produced this chart it was only Thursday - we did not have a Full Week.
This is not really Textbook TA behaviour, but I am using it anyway - strictly speaking, we should wait for the Full Candle to form. The fact is that the Candle I have pointed to is very Bullish in the context of the earlier down move. it’s a nice Hammer - much better than the Daily one I showed you earlier.
Ok, gotta rush to the doctors……….
Happy Day after Boxing Day, wd