On Tuesday, Aviva (LSE: AV) released details of plans for a one-off £3.75bn return to shareholders. The FTSE 100 insurer also confirmed guidance giving the stock a forecast dividend yield of 7.1%, based on the Aviva share price, at the time of writing.
There is a slight catch here, which I’ll explain in a moment. But Aviva shares look cheap to me. This stock is on my list as a possible income buy.
£4.75bn shareholder handout
Things are changing at Aviva. Since taking charge in 2020, Amanda Blanc has sold a number of the group’s businesses, raising £7.5bn. Some of this will be used to reduce the group’s borrowings, but a chunky £4.75bn is being returned to shareholders.
The first £1bn is currently being returned through a share buyback. The remaining £3.75bn will be distributed through a B share scheme.
What this means is that shareholders will receive a new B share for each ordinary share they own. The B share will then be redeemed by Aviva for 101.69p per share.
Returning such a large amount of cash will mean Aviva’s book value falls. To prevent this from triggering a share price slump, Aviva will also carry out a share consolidation. This will cut the total number of shares in circulation, so the Aviva share price should stay the same.
In practical terms, the consolidation means that shareholders will receive 76 new Aviva shares for every 100 they already own. The old shares will then be cancelled.
The whole process is expected to happen in May, after it’s been voted on at Aviva’s AGM.
What’s the catch?
The share consolidation will not affect each shareholder’s percentage holding. But it will mean that the total value of each shareholding falls. For example, a shareholder with 100 shares will see their holding fall to 76 shares. If the Aviva share price stays the same, the value of that holding will fall from £435 to £330, at current prices.
The catch is that the 7.1% dividend yield I mentioned at the top of this piece will only apply to the consolidated shares.
Shareholders who want to maintain the same value shareholding (and dividend income) as they currently have may need to buy additional shares.
The way I’d approach this would be to consider investing some of my B share cash into extra Aviva shares. By doing this I could maintain the position size I want for Aviva in my portfolio.
Aviva share price: why I’d buy
For too many years, Aviva has been known for a sluggish performance that’s lagged rivals. The challenge for Blanc is to prove that she can return this business to steady growth.
In my view, she’s done an excellent job so far, streamlining the business and cutting costs. I see the £4.75bn capital return as a sign that Blanc is not planning any rash acquisitions.
Aviva’s 2021 results suggest to me that growth performance may also be improving. The value of new insurance business written by the firm rose by 6%, with premium income hitting a 10-year high.
As I write, Aviva shares are trading on around 10 times forecast earnings, with that 7% forecast dividend yield. I’d be happy to buy the shares for my income portfolio.