Is Aviva’s 7% dividend yield safe?
The Motley Fool
Published Apr 16, 2019 08:06
Updated Apr 16, 2019 09:07
The FTSE 100’s Aviva (LON:AV) full-year report , chairman Sir Adrian Montague said the company had a year of “steady progress” in 2018 growing its profits and cash remittances.
Big debts and a rising dividend The solvency cover ratio increased to 204%, and I know that if any firm talks about its solvency ratios, it’s a safe bet you’ll find bucket-loads of debt on the balance sheet. I tend to lump Aviva into a pile with the London-listed banks and label the whole lot as being in the debt-laden ‘wider financial sector’.
However, the directors pushed up the full-year dividend by 9% to extend a long period of dividend-raising as you can see from this table:
| Year to December | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 |
| Dividend per share | 15p | 18.1p | 20.8p | 23.3p | 27.4p | 30p |
| Normalised earnings per share | 28.6p | 47.9p | 33.6p | 18p | 33.1p | 34.6p |
Along with erratic earnings we’ve seen a volatile share price over the past few years with big swings up and down and a broad multi-year lurch sideways. I think that makes the share a bit of a moving target for dividend-hunting investors. Time a share purchase poorly, and a down-swing in the stock could wipe out years’ worth of your dividend gains. I reckon that’s the main problem with trying to use essentially cyclical firms such as Aviva for the purpose of dividend investing.
Focused on debt-reduction But right now, the tone is optimistic. Montague said in the report that earnings growth has been achieved by means of higher profits from the company’s major businesses, from the programme of ordinary share buy-backs, from debt-reduction and from “a higher net contribution from longevity and assumption changes.”
Get The App
You can see from the following table that borrowings remain high and the operating cash flow is a bit bumpy, as I’d expect from a cyclical firm. I’m glad to learn that the firm plans to tackle its debt load. If cyclical firms don’t pay down their borrowings when the economic sun is shining they could be in trouble when we see the next major economic slump.
| Year to December | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 |
| Operating cash flow per share | 135p | (18p) | 126p | 116p | 189p | 149p |
| Borrowings (£m) | 6,944 | 9,590 | 8,770 | 10,295 | 10,286 | 9,420 |
Montague asserted that “the security and sustainability of our dividend remain paramount,” but the future growth of the payment will depend on “business performance and growth prospects.” However, because the cyclical aspect is out of the directors’ hands, I’m not keen on Aviva as a dividend candidate.
Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019
First published on The Motley Fool
Written By: The Motley Fool
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.