The British pound has lost 25% of its value vis-à-vis the U.S. dollar over the past three years. The pound’s weakness has weighed on the share price of many British stocks that trade on U.S. exchanges.

Aviva Plc (OTC: AVVIY) is one of those stocks. Its share price (technically, ADRs, which trade like shares) is down 25%. Aviva’s loss is similar in pattern and magnitude to the pounds lost over the past three years.

But fear not. The sky is not the limit and neither is Hades. We all want to buy low and sell high. I see an opportunity to buy Aviva low and to eventually sell it high.

Admittedly, the opportunity is less opportune than it was a few months ago. The pound is up 20% since bottoming in mid-January. Aviva ADRs are up 12% over the same period. But the opportunity is still there.

[ad#Google Adsense 336×280-IA]The name is likely unfamiliar to U.S.-based investors, but Aviva is one of the United Kingdom’s largest insurers.

Its business comprises life, general, accident, and health insurance.

Savings and fund management services are also on the menu.

Though Aviva’s visibility is low in the States, visibility is high across the United Kingdom and Europe.

Aviva operates in 16 countries, serves 33 million customers, and employs 29,600 people.

Its market cap exceeds $25 billion.

Over the trailing 12 months, it generated $50 billion in revenue (all figures have been converted to dollars from pounds).

Rebounding Aviva Performance

The British pound is rebounding and so is Aviva’s financial performance. Aviva recently reported 2016 financial results, and the results were encouraging.

Operating profits rose 12% year over year, general insurance premiums rose 15%, EPS rose 3%. As for the balance sheet, Aviva reported nearly $1 billion in excess cash. Part of that cash will pay down debt, and part of it will embellish the semi-annual dividend. As for the Aviva dividend, shareholders will enjoy a 12% increase with the May 23 payment.

More Aviva dividend increases are on likely on draft (or on draught as the Brits are wont to say).

Aviva is run by dividend-centric executives. These dividend-centric executives plan to increase the dividend-payout ratio to 50% of operating earnings this year, up from 46% last year, and 42% the year before. If operating earnings were simply to hold steady, we’d see an increase in the Aviva dividend payment. Operating earnings should rise at a high-single-digit rate in 2017.

Aviva’s ADRs yield 4% as I write today. As I write a year from today, I expect them to yield considerably more on the cost basis today.

Aviva Dividend Paid in Pounds

Aviva pays its dividends in pounds. As the pound appreciates, it can buy more dollars, thus the dividend in dollars (here in the States) will rise at a higher rate than the dividend in pounds. An appreciating pound will buy more dollars to pay dollar-denominated dividends on the ADRs. The appreciating pound will increase the appeal of the ADRs; thus, the ADRs will appreciate more vis-à-vis the pound-denominated U.K. shares.

The pound has been depressed against the dollar for the past three years. In the past three months, though, the pound has strengthened, and so has Aviva’s ADR price. Aviva’s London-traded shares are up 9% since January. Aviva’s U.S. ADRs are up 13%. The difference is attributable largely to the appreciating pound.

Aviva’s strong growth prospects and the potential for further pound appreciation lead me to believe Aviva dividend payment and Aviva shares will continue to appreciate. Better yet from a U.S.-investor’s perspective, Aviva’s U.S. ADRs will continue to appreciate even more compared to their U.K counterparts . . . and so will the U.S. dollar-denominated dividend.

— Steve Mauzy

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Source: Wyatt Investment Research