Aviva (LSE: AV) (NYSE:AV.US) suffered a cathartic moment in 2012 when it was forced to slash its dividends.
But after years of falling earnings, the only real surprise was that anyone was surprised — the dividend was nowhere near covered by earnings per share (EPS) and was clearly unsustainable.
Since then, things have been looking up, and Aviva was able to lift its final dividend in 2013 to 9.4p per share from the rebased 9p paid in the second half of the crunch year.
At the time, profits were up, costs were down, new business was booming, and growth in developing markets was storming ahead. Chief executive Mark Wilson was both optimistic and guarded, talking of an “intensifying” turnaround while warning that there were still issues to address. He said “Have we made progress? Yes, some. Is it a little faster than anticipated? Probably. Have we unlocked the full potential at Aviva? Not yet.“
Halftime
We’re past the halfway stage this year, and first-half results should be with us on Thursday 7 August. What should we expect?
In May, Mr Wilson famously described Aviva’s first-quarter performance as “reassuringly calm and stable“, which is pretty much what investors in a high-risk business like insurance dream of. New business was still on the up, rising 13% in vale to provide the sixth consecutive quarter of year-on-year growth.
Cash flow was steady, expenses were still falling, and external debt was reduced by £240m.
Restructuring was going according to plan, with non-core business in Turkey, the US, Korea and Italy having been disposed of. Mr Wilson again warned us that there is still a lot to do, telling us that “we remain focused on cash flow, expense efficiency and the clinical allocation of capital to areas where we can maximise returns“.
Full year
Analysts are forecasting a doubling of EPS for the full year, admittedly from a low post-crisis level. With the shares back up to 507p now, that would suggest a forward P/E of 11 with 2015 predictions dropping it to 10.
The City is also expecting further dividend progress, with a yield of 3.3% pencilled in for this year followed by a rise to 3.7% next. That’s a reasonable income, but more importantly it would be covered 2.8 times by earnings — so it’s going to be sustainable.
What’s the key thing to look for on 7 August? I’ll be happy with “reassuringly calm and stable” again.