There’s a gambit insurance salespeople use which goes something like: if you had a machine in the shed which printed £70,000 a year of genuine £20 notes, how much would you insure it for? The customer usually gives a high figure, say in the region of £500,000.
The salesperson then counters, so shouldn’t you insure your homes’ chief breadwinner for the same, assuming they earn £70,000 a year of course? You may have heard a variation of this line yourself.
Insurance companies are like that machine in the shed in as much as they have the ability to churn out cash like few others, and when the muck looks like hitting the fan there is precious security for investors in that.
After the recent worldwide sell-off in equities, we believe Aviva (AV.) can act as one of those relatively safe, secure cash machines for your portfolio.
This is a stock which has returned more than £9 billion to shareholders over the past three years, equivalent to 70% of its current market cap.
With £750 million cost savings being achieved a year earlier than planned, management are now asserting their confidence in surplus capital generation, raising dividend guidance, and embarking on a £300 million buyback programme.
The consensus is forecasting a dividend of 35.4p per share for the year to 31 December, according to Stockopedia, rising to 38.1p in 2025, implying an income yield of 7.6% and 8.2%, with the payout 1.3 times covered by earnings.
Experienced investors know that, normally, yields this high reflect a particularly cyclical or unreliable business, and it is true that insurance companies can be impacted by one-off catastrophes – storms, floods, earthquakes and so on – which explains why industry stock often trade at discounted multiples.
That said, Aviva is not big in these areas as most of its income stems from life, health, home and motor cover, with annuity sales and wealth management other growth lines.
‘Aviva has continued to accelerate growth and shift its earnings mix towards capital-light lines, which should be well-received by investors in our view,’ said analysts at Jefferies following the firm’s first-quarter results.
In the past, there were worries Aviva had spread itself too thinly internationally, but new chief executive Amanda Blanc, appointed in 2020, has sold many overseas operations at better valuations than the wider group.
This has resulted in the company handing back £4 billion of capital since 2021, and further non-core sales could result in similar shareholder returns in future.
Berenberg analysts see the stock going to 584p over the coming months, and we agree the upside is considerable, priming investors for substantial total returns.
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
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