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magazineAviva’s smart investment plan makes this a must buy stock
Life insurer Aviva (AV.) is a cash generating machine. It trades at just 8.2 times 2019’s forecast 62.5p of earnings while paying a generous dividend yield of 6.4% for the same year.
The company’s £3bn capital redeployment plan for the next two years has caused investment bank Jefferies to raise its cash earnings forecast by 9%. It also ‘comfortably projects’ more than 5% growth in its earnings per share figure in the medium term.
Aviva has tightened its focus on the UK market, having exited Russia, the US and Malaysia. While this narrowing of target markets may well pay off it does give the company greater exposure to the uncertainty in the UK economy over Brexit. However, according to chief executive Mark Wilson, 42% of the company’s earnings come from outside the UK so it has some protection.
The plan to exit several markets was aimed at lowering costs and creating greater capital efficiency with higher margins.
He took a knife to the sheer amount of insurance products offered by the company, apparently telling his staff if you can’t explain the proposition in a tweet ‘then kill it’.
Despite this ruthless approach, the FTSE 100 company still provides a wide range of insurance products, covering life, home, motor, health, personal accident and even pets.
Aside from the planned capital redeployment for 2018 and 2019, Aviva is sitting on a great deal of surplus cash. After it has satisfied the amount required by regulators to absorb shocks, the company is forecast to have £11.9bn in surplus funds. This is how it can pay out such bumper dividends from what Wilson describes the ‘embarrassment of riches on our balance sheet’.
Turnaround in fortunes
Aviva was in the doldrums for some years, losing money and damaging shareholder value but those days are well and truly over. The company is now expected to raise its dividend payout ratio to 50% of earnings for 2017, with Jefferies predicting Aviva lifting the ratio to 55% ‘comfortably’ by 2020.
At the company’s recent capital markets day on 30 November, Wilson said that the changes made in 2014 are bearing fruit.
The company’s three-year compound annual growth rate for operating earnings per share is 5% and with healthy growth targets set and generous dividend payout on the cards, Aviva looks a very attractive proposition. (DS)
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