2023-05-12 15:40:50 ET
Summary
- Aviva plc shares have dipped over 10% since the advent of regional banking woes in the United States.
- Aviva results have been resilient, while dividend guidance has been upped. Implied annual dividend per share growth is now in the 6-7% region for FY 2023.
- At 413.7 pence currently, the forward dividend yield is now around 8%. Guidance for low-to-mid single-digit growth thereafter, not including buybacks, looks attractive.
Aviva plc ( AIVAF , AVVIY ) has put in a somewhat frustrating performance recently. These shares had been making good progress since my various "Buy" and "Strong Buy" rated pieces, only to see that largely disappear on the back of a circa 10% stock price decline since early March. At around 414 pence in current London trading, we are basically back to square one now (previous coverage had taken place between 400 pence and 415 pence), albeit with the stock's high single-digit dividend yield cushioning the blow on a total returns basis.
Aviva Share Price (GBX Per Share)
If there is any consolation, it is that the catalyst for Aviva's latest period of share price stagnation lies squarely elsewhere, with the insurer basically caught up in the general selloff following the failure of SVB Financial Group (SIVBQ) et al. in the United States. The ADRs have performed better on account of GBP's gains against the dollar over the same period:
My view last time (and indeed in coverage before that) was that Aviva was in the best shape it had been for some time. Nothing in its results released in the interim have changed that view, with earnings up last year amid some challenging macro conditions and capital returns guidance upped for good measure. With the implied forward dividend yield now in the 8% region, these shares continue to offer good value. Buy.
An Upbeat Set Of 2022 Results
Aviva released a generally impressive set of FY 2022 results . The standout figures include:
- Group adjusted operating profit of £2.213B, up a little over 35% year-on-year.
- Operating EPS of 59.8 pence, up 84% year-on-year.
- Cash remittances from Aviva's operating businesses to the Group of £1.845B, up 11% year-on-year (on a continuing operations basis).
- Excess center cash inflow (i.e. net of debt interest and central costs) of £1.151B, up 4.5% year-on-year and in excess of the cash cost of the dividend.
- Center liquidity of £2.220B, £700m higher than the figure used under management's capital framework, supporting an extra £300m buyback program in 2023.
- 2022-2024 targets on cumulative cash remittances (~£5.4B) and annual own funds generation (~£1.5B) affirmed.
Results look especially respectable in light of some key macro challenges facing some of the company's operating businesses. In UK & Ireland Life, Retirement operating profit increased 32% to £851m, helped by higher expected asset returns and higher new business margins (up 0.9ppt to 4.50%). Sales did fall 21%, principally on the back of lower bulk annuity sales (down £1.8B to £4.4B), but management affirmed 2022-2024 bulk annuity volumes of £15-20B, meaning investors can expect an uptick across 2023-24. In Wealth, net flows of £9.1B helped offset a fall in assets under management ("AUM") driven by negative market movements, though operating profit declined by 11% as revenue is linked to AUM. Across UK & Ireland Life, SII Value of New Business ("VNB") increased 15% to £767m, with management aiming for 5-7% per annum growth in SII VNB going forward.
General insurance ("GI") performance looked particularly resilient in light of claims inflation, post-COVID normalization of claims frequency, and adverse weather in the UK. With that, UK & Ireland GI operating profit only declined by 5% (to £338m), with gross written premiums up 7% to £5.7B. COR increased due to the factors just mentioned, though at 96.1% UK & Ireland GI still produced an underwriting profit for the year. Canadian GI results were outstanding, with operating profit up £33m to £433m on the back of higher GWP (+16%) and higher investment returns, offsetting a higher COR.
Source: Aviva FY 2022 Results Presentation
Aviva Investors remains the weak link, with revenue and operating profit both lower due to negative market movements reducing AUM:
Aviva Investors: FY 2022 AUM & Profitability
Source: Aviva FY 2022 Results Presentation
Dividend Guidance Upped
Aviva's dividend remains central to the investment case, so upgraded guidance is a strong positive. Previously, management saw "low-to-mid single digit growth" in the dividend per share ("DPS"), which is now upgraded to low-to-mid single digit growth in the dividend cash cost. I view that as achievable given growth prospects in areas like bulk annuities and Commercial Lines insurance.
Source: Aviva FY 2022 Results Presentation
Updated guidance is only a slight change to previous, but in light of a new £300m buyback program should be good for 6-7% DPS growth this year versus 3-5% implied previously. Note that future buybacks would similarly add upside potential to annual DPS.
Management has guided for the dividend cash cost to be £915m in FY 2023, while shares in issue stood at 2,808 million at the end of last year. The buyback will lower the share count by approximately 2% by year-end 2023, so by my count the 2023 DPS will land in the 33-33.5 pence per share region, or ~7% higher year-on-year (2022 DPS: 31 pence per share).
Income And Returns Potential Look Attractive
Aviva plc shares trade for 413.7 pence in London trading at time of writing, having fallen from over 462 pence per share immediately prior to SVB's collapse and the advent of fears in the U.S. regional banking space.
This represents unchanged share price performance since last coverage, but with a forward dividend that is now materially higher. On management-guided figures the implied FY 2023 payout quoted above would yield 8%, which I view as attractive for income investors.
At the low-end of management guidance, prospective Aviva plc investors would realize a further 2-3% in annual DPS growth, increasing to 4-5% annual growth at the high end. Implied annual returns of 10-13% look attractive and crucially do not rely on value multiple expansion. A target dividend yield of 6-7% (commensurate with 9-10% annualized returns based on management growth targets) leads me to a fair value for Aviva plc of circa 510 pence (~$12.70/ADS) at the mid-point, or roughly 25% higher than the prevailing share price. Buy.
For further details see:
Aviva: Dividend Guidance Upped, Implied Forward Yield Now 8%