Barclays upgrades Aviva to 'overweight', highlights £1bn buyback potential

Barclays upgraded Aviva to 'overweight' from 'equalweight' and lifted the price target to 567p from 509p, highlighting improving earnings quality and the potential for a £1bn buyback.

The bank reckons Aviva can deploy £1.5bn of excess liquidity in 2018, returning proceeds from asset sales, dividends from UK life operations and ongoing cash generation. It noted that Allianz has been one of the performers in European insurance this year, partly driven by a €3bn buyback, and said it believes Aviva's 2018 buyback will be larger, at 5% of £20bn market cap.

"We believe the combination of the acquisition of Friends Life and the asset sales in France/Spain/Asia will release significant amounts of capital, which Aviva can deploy via debt retirements and share buybacks over a number of years, while also de-risking the balance sheet."

In addition, Barclays pointed to the improving quality of Aviva's earnings. "We believe the difference between operating earnings and net income will narrow, with 84% of earnings falling to the bottom line on average 2017 through to 2022, which should lead to book value growth."

It added that 'overweight' rated Prudential remains its top pick in the sector as it offers long-term compounding growth at a modest premium.

At 1025 BST, Aviva shares were down 0.2% to 510p.