I seem to be spending too long these days looking at shares I bought with high hopes a few years ago and wondering why I’m sitting on a loss today.
Aviva (LSE: AV) is one, which I bought in 2015. With the shares priced at 361p today, I’m down 24%. Dividends have helped, mind, and I’ve pocketed 22% from those, so I’m actually close to break-even on Aviva. But it’s really not the result I was expecting at this stage.
I’d watched Aviva’s crunch in the financial crisis, when its balance sheet was found wanting and its dividend was overstretched and had to be slashed. I then watched the company turn things round and get into a much better shape, resume EPS growth, and quickly get back on a progressive dividend track.
Reaction
But the market has not been convinced, and Aviva shares have fallen to a forward P/E valuation of just six. That’s less than half the long-term average of the FTSE 100, and we’re talking about a stock that’s expected to pay twice-covered dividends at yields approaching 9%.
While the company might have got itself well on the road to recovery, new chief executive Maurice Tulloch has set his sights firmly on the company’s debt and is aiming to reduce it by at least £1.5bn by the end of 2022. That’s a challenging target, and and it’s part of his wider strategy of reducing costs and addressing the complexity of the business.
Split
On the complexity issue, part of the plan is to split Aviva into the two divisions it had before they were merged in 2017, general insurance and life insurance. On costs, Tulloch is aiming to make savings of £300m per year, partly through cutting 1,800 jobs, and some fear that he has his sights set on that high dividend too.
Right now, the company has said it’s sticking to its dividend strategy, so the annual cash payment seems safe for the time being. But would a dividend cut actually be a bad thing?
It would surely send hordes of wailing investors rushing for their sell buttons, as many see dividends as sacrosanct and view a reduction as a sign of failure. But I reckon that’s a part of UK dividend culture that’s misplaced, and we should be happier to accept a variable dividend from year to year as part of a strategy that best provides for the long-term success of our companies.
Debt
And I don’t like debt. Some investors do, and they point to the profitable gearing that can be achieved by using borrowed money to invest in earnings growth. That’s all well and good in happy economic periods, but when we hit tougher times it can come back and bite hard.
What would I do if I saw the Aviva dividend yield reduced to, say, 5% to 6%? I’d probably watch for a price fall and buy more shares cheaply, because there’s nothing wrong with cutting a dividend — not when it’s done for the right reasons as part of a long-term plan.
Whether Aviva shares actually will fall further before they recover, I really can’t say. All that matters to me is their current valuation compared to the company’s long-term prospects. And on that score, I rate Aviva as a strong buy.