7% yield and 6.5% down! Ahead of the Direct Line takeover, now is the time to buy more Aviva shares?

Aviva (LSE: AV) shares have fallen since 29 August – a 12-month trade at £5.08. This is despite a 6% increase from 14 November when it released the trading update for the nine months and Q3.

These look pretty good to me. General Insurance premiums for the nine months were up 15% year-on-year to £9.1bn and Protection & Health sales were up 22% to £403m. Sales of the retirement business rose 67% to £7.3bn and net flows to its Wealth division jumped 21% to £7.7bn.

The company has increased customer numbers by 1.2m to 19.6m since Amanda Blanc took over as CEO in 2020. It plans to grow its position as the UK’s leading diversified insurer with 21m+ customers by 2026.

The main risk to its plans is inflation backfiring in its core markets, I think. This will increase the cost of living, which may prompt existing customers to cancel their policies and prevent new ones.

However, Aviva predicts an operating profit of at least £2bn by 2026. In 2023, it was £1.467bn, which itself showed an increase of 9% in 2022 of £1.35bn.

What does a Direct Line acquisition look like?

Although these results boosted Aviva’s share price, they were not successful in determining the key £5 mark. This proved a difficult price level for the company to hold satisfactorily above since the second half of 2018.

This is not only despite a series of positive results since Blanc became CEO. It has also followed a successful restructuring of the business since then.

That involved selling eight non-core businesses to raise around £7.5bn and re-energize the core. To this are added some important acquisitions, including the April purchase AIGUK life insurance business.

However, the agreement in the policy to buy insurance is a competitor Straight Line looks like a win for Aviva to me. If the deal goes through, it will give the combined company more than 20% of the lucrative auto insurance market. It will also effectively eliminate a competitor and enable efficient savings for Aviva.

It remains to be seen whether, once completed, it will push Aviva’s share price above £5 and keep it there.

Am I worried?

I bought Aviva shares on the dividend yield from their high long-term dividend.

Since a stock’s yield moves inversely to its price, I’m not worried if the price goes down.

Furthermore, analysts forecast that Aviva’s shares will rise to 38.1p in 2025 and 40.9p in 2026. Based on the current share price of £4.75, these would each produce yields of 8% and 8.6%.

I bought £5,000 of Aviva shares a while back and investors thinking of doing the same could make £5,048 in dividends after 10 years. This is based on a current rate of 7% yield and compounding interest.

Over 30 years on two similar terms (which are not guaranteed in any way), this will rise to £35,582. Adding on the initial £5,000 investment would mean Aviva’s holdings at that time would be worth £40,582. This will pay £2,841 a year in income.

As for me, I’m happy with what I have. But if I didn’t, I’d buy the stock today for its strong growth prospects and high yield.