Insurer Aviva (LSE: AV) (NYSE: AV.US) famously got its dividend in a twist during the recession and had to slash it in the second half of 2012, as it was just getting to overstretched to cover — a crash in earnings per share (EPS) from 45p to 11p in just two years is not the kind of thing that cash cows are made of.
The share price took a tumble as a result, dropping to the 250p level.
Bouncing back
But despite a few ups and downs since, the price has recovered nicely to 539p today. and is actually up 60% over the past two years.
The dividend cut marked the start of a turnaround plan for Aviva, after chief executive Andrew Moss departed in May 2012 to be followed by chairman Lord Sharman in July.
John McFarlane took the chair and, in his temporary executive capacity, immediately announced a new strategy of focusing on fewer but stronger businesses, getting capital levels back up, and improving financial performance through growing revenues and cutting costs.
And it’s been paying off.
Rising profits
When 2013 results were released, we heard of a 40% rise in cash remittances, with operating profit up 6%. Operating expenses had fallen 7%, with £360m of cost savings achieved.
New chief executive Mark Wilson said “Following our exit from a number of low margin, underperforming or non-strategic businesses, Aviva is simpler, more focused and better managed. We have significantly improved our capital surplus, increased our liquidity and have a stronger leadership team“.
He went on to say that while progress had been made a little quicker than expected, there was more potential as yet unlocked.
At interim time six months later, things were still going in the right direction, with cash remittances and operating profit still rising and operating expenses still falling.
Dividends too
And, from their rebased level, those dividends are on the way back — there’s an 11% hike forecast for this year which would take the yield to 3.2%, followed by a further 15% in 2015 to 3.7%.
That would put the shares, currently priced at 538p, on forward P/E valuations of 11.3 and 10.3 for the next two year-ends. And with EPS expected to keep growing, that does not look stretching to me at all.
Easily ahead
No wonder, then, that Aviva shares are ahead of the FTSE 100 this year and look likely to stay that way — since the start of January, we’re looking at a gain of 19% compared to just 1% for the index.