Insurance giant readies £4 billion shareholder payout

Our equities writer details the situation at one of the UK’s insurance heavyweights as Deutsche Bank tips the shares to keep climbing.

The income potential drawing ii clients to Aviva (LSE:AV.) shares was backed by a City bank today when it said the insurer continued to offer “highly attractive value” despite a 32% rise this year.

Deutsche Bank said recent half-year results justified a further re-rating for the shares, which it believes have the scope to reach 500p compared with 415.6p at lunchtime today.

Its optimism is underpinned by the view that the sum of at least £4 billion being returned by the middle of 2022 is a “floor not a ceiling”.

It believes that £5 billion will actually be paid and that its calculations point to the potential for capital returns every year for the foreseeable future.

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The £4 billion-plus return signalled by Aviva in interim results this month is already under way after chief executive Amanda Blanc made an immediate start to a £750 million share buyback.

Further details are expected with annual results in March, but Deutsche analyst Oliver Steel assumes the remaining capital return will take place via a special dividend and the simultaneous reduction of shares in issue shortly after next year's AGM in May.

The return comes after eight businesses were sold for £7.5 billion as Blanc focuses on Aviva's strongest and most strategically advantaged businesses in the UK, Ireland and Canada.

The disposals have helped to reduce debt by £1.9 billion in the first half of the year, meaning that debt leverage is now well below its sub-30% target at about 26%.

Confidence in the outlook and underlying cash flows also enabled Blanc to announce a 5% increase in Aviva's interim dividend to 7.35p a share, part of longer-term plans under a recently rebased dividend policy for growth in the low-to-mid single digits.

The latest £289 million payment is due to be made on 7 October.

Deutsche noted today that a forecast dividend yield of 7.3% implies management have an extra four percentage points of excess cash flow to deploy, based on their own cash remittance target for 2023.

Aviva was the fifth most-bought stock on the ii platform in the second quarter of the year and the second most-popular financial company behind perennial favourite Lloyds Banking Group (LSE:LLOY).

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Its shares were as low as 231p in March 2020, but even before the pandemic they had been on a downward trend compared with 550p seen in May 2018.

Blanc, who started her career as a graduate at one of Aviva's ancestor companies, Commercial Union, before holding senior roles at Axa and Zurich Insurance, set out her plans for a turnaround in results last August.

A year later, interim profits from continuing operations rose 17% to £725 million as the UK general insurance arm delivered its highest sales in a decade and net flows into its savings and retirement business rose by nearly a quarter to a record £5.2 billion.

Blanc told City analysts earlier this month: “From the moment we embarked on our refocusing strategy, I have been very clear it is our intention to deliver a substantial return of capital to shareholders, following the completion of the disposals. And I meant it.

“We are moving on this ahead of expectations based on our assessment of the strength of our liquidity and capital position and because we don't believe it's right for us to sit on excess cash and capital unnecessarily.”