Aviva (LSE:AV) shares have lost around 6% of their value since April 2, when they traded at a 12-month high of £4.99.

This means several positive things for me. First, the stock price looks even more undervalued than before. Second, profitability has increased because profitability moves in the opposite direction to the company’s share price.

Either way, it looks like I should see if it’s worth buying more.

Underestimation

Aviva is currently trading at a key price-to-earnings (P/E) valuation of just 12.1.

For comparison, its peer group’s average P/E is 19.7, so it looks very budget-friendly on that basis.

To determine how budget-friendly it is exactly, I performed a discounted cash flow analysis using financial forecasts from other analysts and my own.

This shows Aviva shares are around 40% undervalued at their current price of £4.69. So the fair value of the shares would be around £7.82.

Of course, this is no guarantee that it will ever reach that level. However, it highlights how undervalued the stock currently is.

A vast passive income generator

This is significant to me because it reduces the risk of dividend gains disappearing as share prices continue to decline.

In 2023, Aviva paid a total dividend of 33.4p, which currently yields a yield of 7.1%.

So £17,000 (the average UK savings account amount) would give me £1,207 in the first year. After 10 years of working with the same crop, I would have another 12,070 pounds.

However, I would make much more if I reinvested the dividends into stocks, which is known as “dividend accumulation.” This is the same idea as compound interest in a bank account, but instead of reinvesting the interest, dividends are used.

If I had done this, I would have earned an extra £17,506 instead of £12,070. This would give me a total of £34,506, giving me a payout of £2,358 a year in dividends, or £197 a month.

After 30 years of doing this with an average profit of 7.1% I would have £142,158. This would give me £9,716 in dividends per year or £810 per month!

Strong business prospects

A company’s dividend payout and share price are ultimately determined by profits and earnings. If the latter increases over time, the former will likely do so as well.

Aviva’s main risk is a renewed escalate in inflation in its key markets, which will result in an escalate in the cost of living. This may discourage recent customers from transacting and cause existing customers to cancel their policies.

That said, it reported a 9% escalate in operating profits last year to £1.47 billion from £1.35 billion in 2022.

In addition, Solvency II operating capital generation increased by 8% – to £1.46 billion from £1.35 billion. This can be a powerful growth engine and provide a kind of protection against negative macroeconomic events.

Overall, analyst consensus estimates earnings and revenues to grow 9.3% and 5.4% annually, respectively, through the end of 2026.

Earnings per share are expected to grow 8.8% annually through that point. Return on equity is expected to be 14.6% by then.

For me I think the price is right to add to my existing Aviva holding. I think this will continue to provide me with high passive income, supported by sturdy business growth.