One financial share you should buy today

Financial shares have had a rough time over the last three years.But there are some real gems there that have been beaten down in the rush to get out of the sector.And one particular stock looks very attractive.

Financial shares have had a rough time over the last three years.

No wonder. When you think of financials, the first area that springs to mind is banking. And the bankers have shown they have a real talent for making catastrophic mistakes time after time.

Product mis-selling, Libor-fixing, money-laundering investigations the list goes on. Steering well clear of banks still looks sensible.

But not every company in the financial business is a bank. There are some real gems there that have been beaten down in the rush to get out of the sector.

And if you're bullish on bombed-out European stocks as we are there's one particular stock that looks very attractive

This FTSE 100 giant is barely a quarter of the price it was in 1998

Aviva (LSE: AV)

Today Aviva is the largest insurer in the UK and the sixth-biggest in the world. It's one of Europe's leading providers of life and general insurance, with 36,600 employees serving 43 million customers worldwide.

Yet despite its prominent market position, Aviva has been a huge disappointment for its long-term shareholders. In 1998, the price was around £12 per share. It was £8 before the financial crisis hit. And the stock recently fell below £3, though it's since rallied slightly.

We can't blame Britain's bankers for the whole of Aviva's share price plunge over the years. Most of last year's profits came from longterm' life assurance contracts. The return here increased by 7% compared with 2010. But achieving this has required lots of capital in what's become a difficult market.

Aviva admits it has tried too many changes of strategy that haven't worked out. Big restructuring charges have soured investor opinion. With much of the EU heading back into recession, Aviva's European exposure has also been a millstone. And there have been concerns thatit has loaded up on too much dodgy eurozone debt.

In turn, all this has raised worries about whether Aviva has a big enough capital buffer, particularly as the EU's Solvency II Directive on capital adequacy rules for insurers is set to come into effect on 1 January 2014. Fears have circled that Aviva may need to raise more cash via a rights issue. This would dilute existing shareholders' interests and lower the share price.

Not too encouraging, or so you might think. So why did we add Aviva to the FSL portfolio a month ago?

There's still time to buy Aviva

Last month it announced a full review of all 58 business units. Those that are neither cutting the mustard, nor are likely to, will be sold off. Aviva now says it must raise revenues, and lower overheads and "unnecessary losses and claims". So it's begun a major cost-cutting exercise.

On top of that, Aviva says its aim now will be to boost its overall capital in line with industry peers. This will mainly be done through disposals and "a dynamic capital allocation programme across the group to fund the most attractive propositions and release capital from the least attractive ones".

If all goes to plan, Aviva doesn't plan to raise new equity. And that must help to ease fears of a possible cash-raising rights issue. Also, the group says its future focus will only be on areas where it "can produce attractive returns with a high probability of success".

Sounds good. But the proof of the pudding is in the eating. Will Aviva actually do what it haspromised?

This month's half-year results were a major step in the right direction. The company's clean-up has got underway.It has already incurred some heavy costs, and more are in store.

Meanwhile Aviva has been cutting back shareholders' exposure to sovereign debt issued by Greece, Portugal, Ireland, Italy and Spain. There's talk, too that the group's US arm is about to be sold off.

Since our FSL tip to our subscribers, shares in Aviva have climbed around 10%. I can't give you all our forecasts here today, but let me just say that we believe the stock still has plenty of upside.

There's a chart I'd like to show you. It shows Aviva's share price (in blue) compared with the FTSE MIB (in red), otherwise known as Italy's stock market index, in blue. Note that I've converted the latter into sterling to get a true comparison between the two.

12-08-20-Aviva

Source: Bloomberg

In fact, Aviva's shareholder exposure to Italian equities is relatively small. But if you look at how closelythe two lines track each other, it's clearinvestors have decided that the group's shares are a good play on one of Europe's most battered stock markets.

John Stepek recently suggested you buy bombed-out European stocks, with Italy to the fore.

The chart shows that to get a slice of eurozone action, you don't need to go beyond these shores. If you want to cash in on any Italian rally, buying Aviva shares should do the trick very nicely.

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