Aviva (LSE: AV) (NYSE: AV.US) shares rose by nearly 5% on Thursday morning, after the firm revealed a solid set of 2014 results.
Shareholders were cheered by a 30% increase in the final dividend, taking the total payout for 2014 to 18.1p per share, a 20% rise on the 2013 payout of 15p.
However, 18.1p is a lot less than the 33p paid by Aviva in 2008, or the 26p paid in 2011. Aviva has a terrible record of dividend cuts — can we now trust the firm’s progressive payout policy, or should we look elsewhere?
On possible alternative is Admiral Group (LSE: ADM), the motor insurance firm that has developed a reputation for very generous payouts.
Admiral also issued its 2014 results on Thursday, in which the firm announced a full-year dividend of 98.4p per share, which gives a whopping 6.6% yield — double the 3.3% on offer at Aviva.
Which firm is the better buy for income investors?
Contrasting results
Car insurance premiums have been falling in the UK, and the motor insurance sector went through a soft patch last year: Admiral’s pre-tax profits fell by 4% and turnover fell by 3%, despite a 10% rise in customers. Â
In contrast, Aviva’s recovery in the hands of chief executive Mark Wilson appears to be gaining momentum. Mr Wilson has been focused on reshaping the group to deliver strong cash flow and growth, and appears to be succeeding.
In 2014, the value of new business to Aviva rose by 15% to a record £1,009m, while Aviva’s excess cash flow — a measure of free cash flow generated by Aviva’s operating businesses — rose by 65% to £692m. That’s equivalent to 23p per share, and fully covers the 18.1p dividend payout.
Foolish final thought
Admiral’s chunky 6.6% headline yield is attractive, but the group’s dividend policy is for the total payout to reflect after-tax profits — and these are expected to fall by around 10% in 2015.
In my view, Admiral shares may now drift lower: trading on almost 16 times 2015 forecast profits and with a dividend cut likely this year, there’s no reason to expect them to go higher.
In contrast, I believe Aviva is a far more appealing buy today: the shares trade on a 2015 forecast P/E of 11 and offer a rising dividend payout underpinned by ongoing earnings growth.