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Will there be a stock market crash soon? The odds must have increased, after Bank of England deputy governor Sarah Breeden spoke last week.
“There is a lot of risk out there but asset prices are at an all time high. We expect there will be a fix at some point“, he said. And by the BoE’s generally reserved standards, those are really strong words!
I can certainly understand why many private investors might feel nervous after that. Some may think I’m weird, but I can embrace a summer of falling stock prices, and I’ll explain why. But first, I’ll just park Aviva (LSE: AV.) share price chart here — and I’ll come back to it soon…
Cheap beer, anyone?
Suppose a brewery announces: “Beer prices are very high right now, but we expect them to come down.” I doubt many people would be happy about that — except for the beer vendors and if I were selling my shares now and intending to continue, I would want the stock market to stay up.
But I’m still a stock buyer. And I have no plans to sell anything anytime soon. That’s where Aviva comes in. I bought Aviva shares a while ago, and they came in handy. The problem is, I like the way CEO Amanda Blanc has repositioned the company through radical change… and I’d be happy to own it.
But we’re looking at a forward price-to-earnings (P/E) ratio of over 12 now. And for a business in a cyclical sector, facing the risk of economic stress, I don’t think that’s a cheap valuation. It may be a fair value, considering the current dividend yield of 6.25%. But it’s certainly not a no-brainer buy… and I saw some short-term share price weakness.
A 20% drop?
But what if FTSE 100 should stocks all be down 20%? That is the technical definition of a stock market crash. It will reduce the Aviva P/E to less than 10. And the potential dividend yield can reach 7.5%. Now wouldn’t that make Aviva look like a better buying proposition? It would be the same for me.
And with benefits, there is more benefit. If I can buy at a price that gives me a 20% better yield, the 20% improvement is locked into that purchase… as long as I hold those shares.
Of course, if Aviva shares suddenly look 20% better value, and everything else. But as a stock buyer, that’s a problem I can’t complain about.
Long term
Now, all this only applies to investors who still want to buy and hold for the long term. Those who are selling down, for example to fund their retirement, may have a very difficult time – at least until the markets pick up again, which could be a few years if we’re unlucky.
And while I’d prefer another pick at the moment, I think the dividend yield means Aviva is worth considering for long-term income investors – even if the dividends aren’t guaranteed.
