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

UK insurance company and asset manager Aviva (LSE: AV) has long been a high-yielding stock star in the FTSE 100. With the share price down 12% this year at the time of writing, the attractiveness of the yield has grown. But for me, the stock’s appeal is also driven by two other key factors.

Focus renewed on core business

The first is Aviva’s focus on its core business to keep costs under control as inflation remains high. In the 2022 results, chief executive Amanda Blanc confirmed that the company’s structure had been “radically simplified”.

Focused on increasing the flow of wealth funds into UK, Irish and Canadian general insurance businesses. And this has paid off so far.

In 2022, Aviva’s new life insurance business will increase by 15% from 2021 and general insurance sales will increase by 8%. General insurance written premiums rose 8% to £9.7bn. Operating profit also rose – a 35% defeat – despite the difficult financial market situation after the Russian invasion of Ukraine. Much of this reflects continued growth in the number of subscribers, which in the UK will rise to 15.5m by 2022.

At the same time, Aviva continues to look to sell 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 £7.5bn has been raised so far through the sale.

Major growth in the pension business

A key area that Aviva is targeting for major growth in the future is the increase in demand for pension scheme purchases. This is where a company that owns a (very expensive) benefit pension scheme sells it to another provider, such as Aviva.

By 2022, Aviva is making 50 bulk annuity deals worth £4bn. In February this year, it completed an £850m pension scheme deal for Arcadia Group. Overall, Aviva expects to complete between £15-20bn from these deals by 2024.

What is important to me is that Aviva is not just cutting costs and focusing on its core business. It has also taken care to protect its shareholders.

A high rate of return for shareholders

In 2022, Aviva pays a dividend of 20.7p. This means a total ordinary dividend of 31.0p per share for 2022. The company also announced an additional return to shareholders through a £300m share buyback. This takes the total return on capital to shareholders to more than £5bn from 2021. Overall, it means Aviva offers one of the strongest rates of return in the sector, around 10%.

The main risk for me is that inflation remains high in the UK and Aviva’s other core markets. Higher inflation means paying more in insurance claims. Aviva has increased insurance premiums by 5% earlier this year to try to offset higher inflation. Last year, motor insurance premiums rose by an average of 20% and 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 market. I also think Aviva’s pensions business will offset some, or all, of the slide in its insurance business.

Consequently, I would like to buy Aviva shares at a more significant price.