The yield is attractive and the shares cheap, but these numbers raise some concerns for investors.
The last time Aviva (LSE:AV.) got a new chief executive one of his first acts was to slash the dividend by 44% as part of a rebuilding job in the wake of £3 billion losses.
More than five years later and with the payout for 2018 now double the size, the first week at the helm for new boss Maurice Tulloch sees a switch to a new progressive dividend policy.
Under this strategy, which replaces the current target of a 50% pay-out ratio to operating earnings per share (EPS), Aviva admits that it expects future percentage growth rates "will be more modest than those in the recent past." Today's total dividend under the old policy increased by 9% to 30p a share.
Aviva said the new approach would allow Tulloch more flexibility to implement his strategic agenda, which is likely to be focused on a drive to reduce debt by £1.5 billion by 2021/22 in order to save about £90 million a year in interest expenses.
Analysts at UBS think that dividends will now grow more in line with EPS, but having seen this measure rise at 7% for the past two years to 58.4p the insurer has warned that it may be difficult to sustain this momentum in earnings in 2019.
It pointed out that only half its earnings growth in 2018 was due to higher profits from its major businesses, with the rest of the increase due to share buy-backs, debt reduction and a higher net contribution from longevity and assumption changes.
The dividend policy update took its toll on Aviva shares, which were 4% lower at 416.5p as the widely-held blue-chip stock unwound some of the 16% rise seen in the year to-date. Towards the end of 2018, political and market turbulence and uncertainty caused by the surprise departure of former boss Mark Wilson had left Aviva shares at their lowest level since 2013.
Source: TradingView (*) Past performance is not a guide to future performance
With a forward price/earnings (PE) multiple of 7.7x, Aviva's lowly valuation placed it alongside fellow insurers Direct Line (LSE:DLG), RSA Insurance (LSE:RSA) and Legal & General Group (LSE:LGEN) on the list of high-yielding FTSE 100 stocks. It had been trading with a forward yield of 6.8% rising to 7.7% the year after.
Much of the enthusiasm of income-seeking investors will have been based on a continuation of the old policy, particularly as Wilson told them last year about the potential to increase the ratio to between 55% and 60% of operating EPS by 2020.
UBS, which has a 'buy' recommendation and price target of 525p, described the dividend policy change as "sensible but below our expectations".
Aviva said today:
"The security and sustainability of our dividend remains paramount. We are moving to a progressive dividend policy, which will see the dividend maintained or grown over time depending on business performance and growth prospects."
The group has been encouraged by operational progress in 2018, with the life and general insurer increasing UK profits thanks to winning more workplace pension schemes and bulk annuity deals. Internationally, the company grew profits by 9% but there was disappointment at Aviva Investors after profits fell 11% to £150 million in a challenging year for the fund management industry.
The company's Solvency II cover ratio rose to 204%, which is well above a working range of 160% to 180% despite weaker investment markets and deploying £1.5 billion to repay debt and repurchase shares. The company is braced for more uncertainty, having carried out extensive planning and scenario testing for Brexit, with pre-emptive actions including hedging and increasing Brexit reserves by about £100 million to about £400 million.
Mr Tulloch, who has been with Aviva since 1992, said: "We have strong foundations but we are only scratching the surface of our full potential.
"There's a huge opportunity here. At the heart of it, it's all about insurance fundamentals, delivering excellent customer experience, tackling complexity and injecting a different pace of change into Aviva.
"And that will be just the start. I am determined to re-energise Aviva and deliver long term growth for our shareholders."
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