Interactive Investor

Dividend hike at Aviva with positive momentum set to continue

The FTSE 100 insurer boosts investor payouts after delivering strong first-half figures, writes our head of markets Richard Hunter.

16th August 2023 09:00

by Richard Hunter from interactive investor

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Aviva (LSE:AV.) has delivered a strong set of numbers, with confidence underlined by an upbeat outlook where the positive momentum is expected to continue.

Its trading over more recent times has been solid despite the various challenges of a weaker investment market, a level of higher claims and the uncertain immediate fate of the UK economy. The group has grasped the nettle of these challenges on any number of fronts.

Its financial position has allowed reinvestment in the business, including bolt-on acquisitions, while more broadly its move towards the digitisation of its products gives it something of an edge. At the same time, Aviva has borne down on costs to the extent that the expected savings of £750 million by 2024 are now expected to be achieved a year early. In terms of this report, costs were flat, which is no mean achievement given the estimated 7% of inflation which the group has absorbed.

In terms of capital strength, the Solvency coverage ratio has dipped slightly but remains at a highly comfortable 202%, marginally ahead of consensus estimates of 199%. Alongside the other measures of added profitability and cost control, the dividend has been increased further with a projected yield of 8.3% signalling a clear invitation to income-seeking investors. Indeed, the plan for the full year assuming a continuation of the group’s current momentum would result in a further hike in the yield to 8.8%.

There are a number of areas in which Aviva continues to prosper. There is an element of inter-dependency in the products it offers, providing scope for cross-selling opportunities as well as the bulk annuities business where Aviva Investors can take on the investment mantle. In addition, the group has reduced its geographical footprint to concentrate on the UK, Ireland and Canada where it has dominant positions in each territory.

Aviva Investors has suffered from the wider market malaise, with a reduction in profit from £14 million to £9 million. However, the overall increase in gross written premiums both in the UK and Canada of 13% and 12% respectively more than compensates, with an additional boost from retirement sales which grew by 17%.

The metrics have resulted in a Combined Operating Ratio of 94.8%, comfortably below the 100% benchmark at which the business is profitable. Group operating profit of £715 million is an increase of 8% from the year previous and is ahead of expectations for a number of £701 million. In terms of outlook, Aviva estimates operating profit growth of between 5% and 7% for the year.

In all, the numbers are slightly ahead of expectations, with new business growth, acquisitions, fresh products and a focus on costs all adding to the group’s positive direction of travel. Aviva may be in the driving seat for those factors within its control, but wider questions have weighed heavily on the sector as a whole and this could take some time to reverse. The share price has declined by 19% over the last year, as compared to a dip of 2% for the wider FTSE 100, with the market consensus of the shares recently having been slightly downgraded to a strong hold. Even so, any continuation of this momentum could yet return Aviva to the position of being a more favoured play within the sector.

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