Over the past 24 months, the Aviva(LSE: AV) share price has surged, rising from around 350p following the Brexit vote in 2016, to about 516p today. However, despite these recent gains, the stock has struggled over the longer term.
In fact, the Aviva share price has not been able to push above 550p since the financial crisis, and the shares are still a long way off the all-time high of 1,227p printed at the beginning of April 1998. Including dividends, the stock has returned 4.7% per annum for investors over the past 15 years.
But despite Aviva's mixed performance over the past decade, I believe 2018 could be the year the shares finally return to 600p.
A landmark year
Aviva has been in recovery mode for the past few years. Management has been selling businesses to free up capital and improve operating performance while at the same time reinvesting in other areas to help the group stay ahead of the competition.
It now looks as if these efforts are starting to pay off. Earlier this year, management revealed that the firm now has £2bn of 'excess capital,' which it's planning to redistribute over the coming months.
As part of the redistribution, the firm launched a £600m share buyback at the beginning of May and is also planning to spend on £900m debt reduction and £500m on bolt-on acquisitions, such as the £100m purchase of Friends First in Ireland.
Buying back stock, paying down costly debt, and buying up growth should only accelerate Aviva's earnings growth and I expect the benefits from these efforts to start showing through in earnings soon. City analysts seem to agree. They're predicting earnings per share of 57p for 2018, up from last year's reported figure of 34.2p on a net profit of £2.2bn. Further growth is expected in 2019 as analysts have pencilled in a net profit figure of £2.3bn.
Based on the City's growth targets, I'd expect the Aviva share price to trade at a sector-average multiple at the very least. But the shares are currently changing hands for just 8.8 times forward earnings, a discount of 28% to the rest of the insurance industry.
As Aviva has tried to turn itself around over the past three years, you could argue that the company deserved this discount. But now the firm is back on track, a 28% discount to the rest of the industry seems excessive. An industry average multiple would see the shares trade up to 695p, taking them close to the pre-financial crisis high of approximately 750p.
And as well as the stock's bargain-basement valuation, shares in Aviva also support a market-beating dividend yield of 6.1%. It looks as if the payout is only going to grow further in the years ahead as the earnings benefit from management's efforts to streamline the business.
So overall, considering Aviva's discount valuation and predicted growth for 2018, I believe the share price can return to 600p this year.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.