ii view: Aviva confident despite wildfire payouts
A management team focused on improving efficiency and with the shares offering a highly attractive dividend yield. Buy, sell, or hold?
16th November 2023 15:37
by Keith Bowman from interactive investor
Nine-month trading update to 30 September
- Continues to expect full-year operating profit to rise by between 5% and 7%
- Continues to expect a total full-year dividend of 33.4p per share
Chief executive Amanda Blanc said:
“We have clear trading momentum, driven by our uniquely diversified business, as well as our leading positions in growing markets.”
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ii round-up:
Life and general insurance provider Aviva (LSE:AV.) today reiterated its full-year profit expectations despite suffering insurance claims payouts for both Canadian wildfires and UK and Irish storm damage.
Annual operating profit remains on track to grow between 5% and 7% year-over-year, even though there's been a deterioration in its general insurance combined operating ratio (COR) to 96.3% from last year’s 94.2% following various weather-related events. The further below 100% the COR is the more profitable the business.
Shares in the FTSE 100 company rose around 1% in UK trading having come into this latest news down by close to a tenth year-to-date. That’s similar to rival Legal & General Group (LSE:LGEN), although below a near-2% fall for the FTSE 100 index itself in 2023.
Aviva provides savings, retirement pension products and general insurance including car and home cover to over 18 million customers across the UK, Ireland, and Canada.
A 13% rise in general insurance customer premiums to £8 billion helped offset some of the claims payout during the period, aided by new business volumes. Retirement sales climbed 2% year-over-year to £4.4 billion, helped by over 350 new corporate workplace customers, while Health & Protection sales improved by almost a quarter to £330 million.
On the downside, and given a tough backdrop for global stock markets, fund flows into its Wealth business retreated 9% to £6.4 billion compared to the same period last year.
The broadly positive overall group performance gave management sufficient confidence to reiterate its guidance for a total full-year 2023 dividend of 33.4p per share, a potential increase from 2022’s 31p.
Broker Morgan Stanley reiterated its ‘overweight’ stance on the shares post the news, flagging an estimated fair value price target of 480p per share. Full-year results are scheduled for 7 March.
ii view:
Aviva operates via the five areas of UK and Irish life, UK and Irish general insurance, Canadian general insurance, Aviva investors encompassing its asset management operations, and international investments taking in its business partnerships in both China and India.
Under chief executive Amanda Blanc, its goals include becoming a simpler, more competitive and more commercial company. Overseas businesses lacking the relevant scale have been sold, with its focus now on the UK, Ireland, and Canada.
For investors, the difficult economic backdrop for global markets including heightened interest rates is hindering flows into its Wealth business with deposit savings accounts now a more realistic alternative. Geographical diversity at Aviva has reduced following various business sales, while exposure to general insurance leaves it calculating risks in relation to unknown events such as increased flooding global climate change.
On the upside, Aviva is now a more geographically focused business, but one which retains business type diversity including exposure to pension and health insurance provision. Cost reduction remains a high management focus, investment in its operations is ongoing, while its capital cushion, or Solvency II ratio of 200%, remains robust.
In all, and given broadly robust sales, a focus on improved operational efficiency and a forecast dividend yield of around 8%, income investors will likely remain firmly supportive.
Positives:
- Targeting costs
- Attractive dividend yield (not guaranteed)
Negatives:
- Reduced geographical diversity
- General insurance is subject to events outside of management’s control
The average rating of stock market analysts:
Buy
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