Why Aviva shares just tumbled to three-week low

Lofty City expectations counted against Aviva (LSE:AV.) shares today after new medium-term targets as part of the insurer’s “next chapter” of growth were given a downbeat response.

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The company’s refreshed ambitions in the wake of this summer’s Direct Line acquisition include compound earnings per share growth of 11% and return on equity above 20% by 2028.

It also said it is on track to achieve 2026 targets one year early, with an operating profit figure for 2025 of £2.2 billion better than the £2 billion required. This would represent 18% compound annual growth over the £1.4 billion delivered in 2022.

Chief executive Amanda Blanc told investors the outlook “has never been better” as she highlighted Aviva’s the impact of an increasingly diversified business model, 25 million strong customer base and mainly capital-light earnings.

Her approach since taking on the role in 2020 has resulted in a total shareholder return of 260%, with shares up more than 40% this year.

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However, they fell from yesterday’s multi-year high near 700p as Aviva’s new 2028 guidance failed to meet expectations in some parts of the City.

Analysts at UBS said Aviva’s new targets would take earnings per share to 75p by 2028, which they noted is 7% lower than the market consensus at about 80p.

However, Bank of America said the guidance still placed Aviva at the upper end of the European composite peer group including Zurich, Axa and Allianz in terms of earnings, return on equity and capital returns. It sees upside risk given Aviva’s history of beating targets.

The bank, which has a price target of 720p, said: “We think this will appeal to long-term investors and we are comfortable with our Buy rating after another strong update from the Aviva team.

“Aviva has hit or beaten all of its existing targets, and we think it will beat its new targets, which suggests further upside risk over the coming years.”

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Today’s presentation, which contained no change in dividend policy, highlighted the progress of the Direct Line integration since the deal for the general insurer completed in July.

Aviva now expects to achieve £225 million in cost synergies, nearly twice the original estimate, and to unlock £500 million of capital synergies by the end of 2026.

Aviva's current dividend policy is for mid-single-digits annual growth in the dividend cost, which was topped up at interim results by an additional 5% from the acquisition of Direct Line.

The company also conducted £300 million a year of buybacks prior to the acquisition and has stated a plan to reintroduce buybacks in 2026. Bank of America thinks this will contribute about two percentage points to the 11% earnings per share growth target.