Although I consider myself to be an income-seeking investor, I’ve always been of the opinion that a dividend must first be sustainable before I consider investing in the company.
Indeed, there seems to be little point in investing in a company that, in the long run, will be unable to afford its dividend payments. Doing so may be fine in the short run but, as a longer term investor, it makes little sense to me.
So, the fact that Aviva (LSE: AV) (NYSE: AV.US) cut its dividend payments in March of this year seems to me to be a sensible move.
Moreover, although there were murmurings among some investors of it no longer offering a 6%+ yield, it looks as though the cut was logical, prudent and showed that management are acting in the best interests of long-term shareholders.
Indeed, the most recent results released by the company show that its turnaround story is progressing well. The value of new business increased by 17% in the first half of 2013 versus the comparative period in 2012, with particularly encouraging growth being seen in France, the UK, Poland and across Asia.
Furthermore, profit after tax improved considerably, with Aviva making a profit of £776m having made a loss of £624m in the first half of 2012. Cash flows, meanwhile, have also increased by 30% to £573m, with operating capital generation being slightly higher at £936m versus £906m in 2012.
Commenting on the results, Aviva chief executive Mark Wilson said that tackling the ‘legacy issues’ will take time, but that he is “committed to achieving for investors what we set out to do: turning around the company to unlock the considerable value in Aviva”.
Of course, shares currently yield less than they did before the dividend cut, but a prospective yield of 4% still looks very good to me — especially now it is far more sustainable than it previously was.
In addition, shares seem to offer good value, trading on a price-to-earnings (P/E) ratio of 8.8. This compares favourably to the FTSE 100 and to the wider financials industry group, which have P/Es of 15.1 and 18.8 respectively.
So, Aviva looks to be making a comeback, with growth opportunities in emerging markets as well as certain developed ones (including the UK). Furthermore, shares offer an above average (and sustainable) yield and relatively cheap valuation.