Why I'd pay up to 540p for Aviva plc shares

I consider Aviva(LSE: AV) to be a bargain buy, with its shares currently trading at 480p. Let me show you why I'd still consider it a bargain at up to 540p, and explain the upside potential I see on offer.

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Laggard no longer

Aviva was the biggest FTSE 100 insurer 10 years ago, with a market cap of around £20bn. The second largest was Prudential, valued at £16bn, with number three, Legal & General, at £10bn.

Prudential's value has since more than doubled to over £40bn, L&G's has climbed to £15bn. But Aviva's is at the same £20bn as a decade ago.

It's taken Aviva far longer to recover from the 2008/9 financial crisis than its peers. However, the future is now looking bright under chief executive Mark Wilson, who joined the company at the start of 2013, fresh from restructuring Asian insurance giant AIA. He's now done an equally good job in turning around the Footsie firm.

Aviva is able to boast of being a company with a strong balance sheet, good geographical diversity (42% of earnings from outside the UK) and with a business designed to be resilient to a low interest rate environment.

The company said earlier this month: "Over the last three years Aviva has been through a significant transformation and it is now entering the growth phase of its development".

Substantial upside

I'm expecting Aviva to post earnings per share (EPS) of around 44p for 2016 when it announces its annual results on 9 March. For 2017, I anticipate EPS to advance to around 50p -- a 13.6% rise.

At its current share price of 480p, the company is trading on 9.6 times forecast 2017 EPS. Meanwhile, the PEG ratio -- price/earnings (9.6) divided by EPS growth (13.6%) -- works out at 0.7.

A PEG of below 1 is generally considered cheap and above 1 expensive. Thus, Aviva has considerable appeal with a PEG of 0.7. I'd be happy to buy at a PEG of up to 0.8 -- represented by a share price of 540p -- as this still offers substantial share price appreciation on a rerating to the neutral PEG marker of 1.

At a PEG of 1, Aviva's shares would be trading at 680p, offering upside potential of 42% from the current price of 480p and 26% from my upper 'buy' level of 540p.

At 680p, Aviva would not only be on a neutral PEG of 1, but also trading at 13.6 times forecast 2017 EPS which fits well with the long-term average forward EPS multiple of the FTSE 100 as a whole of around 14.

Attractive dividend

Aviva's dividend represents an added attraction. I'm content to be a little more conservative than the City consensus and pencil in 22.5p for 2016 and 25.5p for 2017. This gives a yield of 4.7% rising to 5.3% at the current share price of 480p and 4.2% rising to 4.7% at my upper 'buy' price of 540p.

At my target 'fair value' price of 680p, the yield would be 3.3% rising to 3.7% which would bring it broadly in line with the Footsie as a whole.

But is Aviva the best growth stock?

I view Aviva as a company with tremendous growth prospects and a nice dividend yield to boot. But could there be an even better growth pick on the market today?

The Motley Fool's experts are convinced there is and they've published a compelling analysis of the business in question in a FREE without obligation report called A Top Growth Share From The Motley Fool.

Our analysts are confident this 'stylish' company can continue its stunning growth trajectory. To find out why, simply CLICK HERE.

G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.