ii view: Aviva in good shape as debt keeps falling

Despite an ongoing transformation, this insurer offers a divided yield of over 5%. Buy, sell or hold?

Full-year results to 31 December 2020

• Operating profit down 1% to £3.16 billion
• Final dividend of 14p per share
• Total payment for the 2020 financial year of 21p per share

Chief executive Amanda Blanc said:

“2020 was a year of significant change for Aviva. We have taken major steps forward in simplifying the business, most recently with the sale of Aviva France and today's announcement of the sale of the rest of our Italian operations. Our strategic focus is now on the UK, Ireland and Canada where we have leading positions. We are putting customers at the heart of everything we do and I am confident we will transform Aviva's financial performance and deliver greater value for our shareholders. I recognise we have much more to do and we are getting on with it.

“Aviva is financially strong and following the completion of the major disposals, we will be in a position to make a substantial return of capital to our shareholders. We are also announcing today an £800 million debt tender offer. This allows us to accelerate our debt reduction plans and lower debt by a total of £1.7 billion in the first half of this year.

“Aviva is proud to be the UK's leading insurer. We are the only insurer in the UK to meet the needs of customers at every stage of their lives. Our potential is clear and we are determined to realise it for the benefit of our customers, our people and our shareholders."

ii round-up:

Tracing its history back to 1696, Aviva (LSE:AV.) today provides savings, retirement pension products and insurance to over 31 million customers.

Having sold operations in places including Singapore, Indonesia, Turkey and Hong Kong, it is now looking to focus on the UK, Ireland and Canada. 

Aviva highlights itself as the UK’s largest insurer with a 23% share of the UK life and savings market. It is also a leading general insurer in both the UK and Ireland. Its general insurance customer numbers in Canada number nearly 2.4 million.

Its investment management business Aviva Investors had £366 billion of assets under management as of the 31 December 2020. 

For a round-up of these latest results, please click here.

ii view:

Current and previous chief executives have put in place plans to make Aviva simpler, more competitive and more commercial. These latest results have seen its portfolio of international businesses reduced, and areas of strength such as its retirement operations built on. Bulk purchase annuities sales rose to nearly £6 billion in 2020 from £4 billion in 2019. The rising cost of providing staff pensions has seen many companies closing and then offloading their obligations via bulk purchase annuities to outside entries such as Aviva. 

Having previously announced a rebasing of the dividend, management also continues to prepare the ground for an eventual return to shareholders of surplus of capital following business disposals and a reduction in group debt. It eventually plans to grow the dividend per share by low to mid-single digits as growth in its newly focused geographical markets hopefully builds, costs are cut and lower levels of debt and associated interest payments are made. 

For investors, despite some ongoing presence, sales of various overseas interests and operations clearly reduces its geographical diversity. The rebasing in the dividend payment also sees a total payment of 30p per share in 2018 fall to 21p in 2020. That said, a concentration of areas of strength such as the UK and Canada does make sense. Costs continue to be targeted and an estimated forward dividend yield of over 5% is still attractive in the current ultra-low interest rate environment. In all, a robust balance sheet and increased business focus look to give firm foundations from which to keep improving. 

Positives: 

• Cost reduction a focus
• Still attractive dividend yield (not guaranteed)

Negatives:

• Loss of geographical diversity
• General insurance is subject to events outside of management’s control

The average rating of stock market analysts:

Strong buy