Insurer Aviva (LSE: AV) (NYSE: AV.US) was famously forced to slash its overstretched dividends in 2012, disappointing a lot of investors who apparently thought that uncovered yields of nearly 9% were sustainable.
But since then, Aviva’s new policy of rebuilding its dividend from a rebased level seems to be paying off, and we’re already expecting the annual payment to rise ahead of inflation on the back of a return to strong earnings growth.
Here’s what Aviva’s dividend picture looks like:
| Year (to Dec) |
Dividend | Yield | Cover | Rise |
|---|---|---|---|---|
| 2010 | 25.5p | 6.5% | 1.47x | +6.3% |
| 2011 | 26.0p | 8.6% | 0.43x | +2.0% |
| 2012 | 19.0p | 5.1% | n/a1 | -30% |
| 2013 | 15.0p | 3.3% | 1.47x | -21% |
| Â 2014* |
16.6p | 3.3% | 2.83x | +11% |
| Â 2015* |
19.1p | 3.8% | 2.72x | +15% |
* forecast
1 = negative EPS
My first thought looking back at that table today is why on earth did it take Aviva so long to get a grip on what was happening and get that dividend under control?
Return to growth
But that’s history now, and going forward we have two years of very well-covered yields with double-digit rises forecast. The yields aren’t market-beating, but this year’s expected 3.3% at least beats the FTSE 100 average, and the 3.8% penciled in for 2015 is really starting to look respectable again.
At the end of last year, chief executive Mark Wilson told us that the focus was on “cash flow plus growth“, and revealed a 40% rise in cash flows with operating expenses reduced — and Aviva turned 2012’s loss into a profit.
And at the interim stage this year, the first dividend installment was raised by 4.5%.
Rich pickings
The overstretched and subsequently slashed dividend didn’t do a lot for the Aviva share price at the time, and it reached a 2012 low of around 255p — with the shares trading today at 517p, there was clearly a great opportunity bottom-pickers who would have more than doubled their money had they managed to get the timing right.
But what many people miss is that such times are great for those looking for long-term dividend bargains too. It was pretty obvious that Aviva would be working towards getting its dividend rising again in a controlled manner — because paying dividends is what insurance firms do.
Nice yields!
If you’d managed to snap up some shares at that low price in 2012, the 15p per share paid out the following year would have given you an effective yield of 5.9% on the price you paid. And if forecasts are accurate, you’ll be looking at yields of 6.5% this year and 7.5% next!
That underscores the key factor for me for income investing — payouts that are likely to beat inflation year-on-year over the long term.