After a 10% drop in price, is this star high-yield stock a bargain now?

The British insurer and asset manager Aviva (LSE: AV) has long been a high-yield stock star in the FTSE 100. With a 12% drop in share price this year at the time of writing, its yield appeal has increased significantly. For me, though, the attractiveness of the shares has also been boosted by two other key factors.

Renewed focus on core businesses

The first of these is Aviva’s focus on its core businesses to keep costs under control as inflation remains high.

In the 2022 results, chief executive officer Amanda Blanc highlighted that the company’s structure had been “radically simplified”. The focus has been on increasing wealth fund flows into the UK, Ireland and Canada general insurance businesses. And this has paid off so far.

In 2022, Aviva’s life insurance new business increased by 15% in value from 2021 and general insurance sales went up 8%. Its general insurance written premiums increased 8% to GBP9.7bn. Operating profit was also up — a whopping 35% — despite difficult financial market conditions following Russia’s invasion of Ukraine.

Much of this reflects continued growth in customer numbers, which in the UK increased to 15.5m in 2022.   At the same time, Aviva continues to look to sell off its non-core business assets. Since Blanc took over in 2020, eight non-core businesses have been sold in Singapore, Italy, France, Poland, and Turkey.

Overall, around GBP7.5bn has been raised to date through these sales.  

Major growth in the pensions business

A key area targeted by Aviva for major future growth is the surge in demand for pension scheme buyouts. This is where companies with (very expensive) defined benefit pension schemes sell them on to other providers, such as Aviva. In 2022, Aviva made 50 such bulk annuity deals worth GBP4bn in total.

In February this year, it completed an GBP850m pension scheme deal for Arcadia Group. Overall, Aviva expects to finalise between GBP15-20bn worth of these deals by 2024. What’s important for me is that Aviva has not just cut costs and focused on core businesses.

It has also been careful to look after its shareholders.

High rate of return for shareholders

In its 2022 results announcement, Aviva declared a final dividend of 20.7p per share. This meant a total ordinary dividend of 31.0p per share for 2022. The company also announced an additional return to shareholders through a GBP300m share buyback.

This takes the total capital return to shareholders to over GBP5bn since 2021. Overall, it means that Aviva offers one of the strongest rates of return in its sector, at around 10%. The key risk for me is that inflation remains high in the UK and Aviva’s other core markets.

Higher inflation means will it pays out more in insurance claims. Aviva already increased its insurance premiums by 5% earlier this year to try to offset higher inflation. Last year, it increased its motor insurance premiums by an average of 20% and its home insurance premiums by 13%.

With rising premiums, there is a danger of customers switching to other providers. This said, I think inflation is at or near its peak in Aviva’s core markets. I also think Aviva’s pensions business will offset some, or all, of any slide in its insurance business.

Consequently, I am looking to buy Aviva shares on any further significant price dips.