It’s been a good year for the insurance sector, that’s for sure.
And it’s been a pretty nice 2013 so far for Aviva (LSE: AV) (NYSE: AV.US), despite the firm having gone into the year with its 2012 final dividend slashed!
Aviva had provided shareholders with an 8.6% dividend yield for 2011. That wasn’t close to being covered by that year’s earning, but when the firm held its 2012 interim dividend at 10p per share, many didn’t care about that and just hoped for a fat final payout again.
Horror!
But then came the bombshell.
In March this year, Aviva’s final payment for 2012 was slashed by 44% — to just 9p per share, from 16p the year before. Aviva cited a shift in priorities towards improving cashflow and reducing debt, to ensure future dividends were covered by earnings and by cashflow.
On the day of the announcement, the share price slumped by 12.5% — and Aviva went on to slice the same 44% off its next interim dividend in August, reiterating its reasons for the new rebased level.
Bad news? Not a bit of it!
No looking back
You see, since the beginning of January, Aviva shares have climbed by 21% to reach today’s 450p, and shareholders should be able to add an extra 3.4% to that from this year’s dividends. Even after being drastically pruned, the yield is still better than the FTSE’s average of 3.1%, and analysts are forecasting a rise to 3.7% for next year.
Now, maybe I’m failing to see the disaster here, but a total gain of 24.4% looks like a winning result to me — especially as the shares are still on a forward P/E of only a bit over 10 based on year-end expectations, dropping to nearer 9 on 2014 soothsaying.
The fundies
But what if we look at Aviva’s actual performance? Well, at the interim stage this year, cash remittances were up 30% and operating capital generation was up 3.2%. Operating profit was 5% higher, restructuring costs had been cut by 10%, and the value of new business was up 7%.
Chief executive Mark Wilson said at the time “I am committed to achieving for investors what we set out to do: turning around the company to unlock the considerable value in Aviva“, and the signs suggest that is happening. Aviva is no longer hamstrung by paying out cash it can’t afford in order to keep short-sighted investors happy, and it can use more cash in the future to pay down debt, to cover the up-front costs of restructuring, even perhaps to buy back shares.
Essentially, the Aviva board can do whatever it feels is the best option at the time, and that’s actually what shareholders employ them to do — and if you don’t trust them to put your capital to its best use rather than blindly handing out all the cash, then you shouldn’t buy the shares.
But those who did buy, well, they’ll be among 2013’s winners.