Investing in boring-but-well-run companies isn’t everyone’s cup of tea. In today’s world of rapid innovation and change, many private investors prefer to chase the next big theme. I don’t sit in that camp.
Having suffered something of an identity crisis over the past few years, the Aviva (LSE: AV) share price has lagged well behind its industry peers. But with a new CEO now firmly in place, a streamlining of its portfolio and a growth agenda, is this sleeping giant about to make a comeback?
Transformational agenda
Since taking the reins, Amanda Blanc, has accelerated Aviva’s rationalisation programme. In 2021, it divested itself of non-core businesses, generating £7.5bn. As a result, the business is now focused on insurance, retirement solutions and wealth management. It operates in the UK, Ireland and Canada.
In 2021, it delivered a solid (if not spectacular) set of results. At its largest business unit, UK & Ireland Life, adjusted operating profit fell 25%. This was partially offset by a rise in its other two divisions, General Insurance and Aviva Investors.
This average set of results was to be expected set against such a large divestment programme. Although analysts remain cautious about the company’s near-term growth, looking more long term, the share price looks cheap to me.
Market propositions
Aviva has a number of market-leading propositions. It’s the largest life insurer with a 25% market share. It has 4m individual workplace pension members and 23,000 corporate clients. Its bulk purchase annuity (BPA) has been growing rapidly. Here, it offers pension trustees a means of de-risking their final salary pension schemes. The market for such schemes is estimated to be worth £2trn.
Aviva Investors has £268bn of assets under management. The contracts it generates with BPA feed directly into this business. The proliferation of ESG investing is likely to be a further tailwind too.
What I particularly like is the synergy across its three business divisions. The scale of its shared capabilities not only drives cost savings but enhances knowledge and know-how. As digitisation advances, this presents an upselling opportunity across its entire portfolio.
Dividend and investment policy
Aviva intends to pay out £870m in dividends in 2022. With an estimated payout of 31.5p per share, that equates to a yield of 6.9%. This is expected to increase to 33p in 2023, and grow by low-to-mid single-digits thereafter.
Interestingly, as part of its payout in 2022, it has proposed a ‘B’ share scheme. For illustrative purposes, an ordinary shareholder with a holding of 100 shares at the record time (April 2022) will receive cash of £100 via the B Share Scheme, and will have a remaining holding of 75 new ordinary shares.
Personally, I would prefer if the business concentrated more on investment for growth at this critical juncture but it’s still a welcome bonus. It has targeted £300m between 2022-24 for this specific purpose.
The clear risk for Aviva is that its transformation agenda doesn’t translate into an improved bottom line. However, with so many structural tailwinds, including 25% of the population being over the age of 65 by 2039; a frenzy for green investing; and pension freedoms, today’s share price looks extremely cheap to me. On any dip, I intend to buy more.