2023-03-11 04:01:13 ET
Summary
- Aviva’s operating performance remained quite positive during 2022, despite the challenging backdrop.
- Its capital position is quite solid and well above its own internal target, supporting its high-dividend yield.
- It also announced a new £300 million share buyback program, further enhancing its capital returns to shareholders.
Aviva (AVVIY) reported recently its 2022 financial figures which were positive, plus it also announced a new share buyback program enhancing its total shareholder remuneration policy.
Dividends & Earnings Analysis
I've recently published an earnings preview on Aviva, and the company has reported on March 9 th its 2022 annual earnings, which were positive and announced a new £300 million share buyback program that is slightly above expectations (of about £250 million). This represents some 2.4% of its current market value, which enhances even further its shareholder remuneration policy.
Beyond its new share buyback program, the company also announced a total dividend related to 2022 earnings of £0.31 per share, in-line with its guidance, which at its current share price leads to a dividend yield of more than 7%. This yield is clearly attractive and is higher than compared to its European insurance peers, making it one of the best income plays within the sector.
Moreover, Aviva upgraded its dividend guidance, as previously was guiding for low-to-mid single dividend per share growth in the coming years, but due to the share buyback program, is now guiding for cash cost growth. Aviva's dividend payment related to 2022 represents a cash cost of £870 million, and is guiding to a cash cost of £915 million in 2023, with further growth now being based on annual cash cost.
Dividend (Aviva)
As the company is now pursuing to repurchase its own shares, it could deliver a growing dividend using the same annual cash cost, which wasn't exactly its intention. By moving its dividend decision to a cash cost basis, this means dividend per share will grow even more compared to its previous guidance, given that shares outstanding will decline due to its repurchase activity.
Regarding its operating performance, Aviva reported a good year despite the challenging macroeconomic environment, showing the strength of its business model. In the U.K. and Ireland life segment, the value of new business increased by 15% YoY, while in the general insurance segment it reported an increase of 8% in premiums. In wealth management, Aviva was able to achieve net flows of more than £9 billion, which is quite impressive considering the tough year for capital markets.
This positive performance was to a large extent supported by the company's largest segment, UK and Ireland life business, which reported an increase of 35% YoY on operating profit to £1.9 billion. In general insurance, its combined ratio was 94.6% in 2022, which means its non-life insurance operations were profitable on an underwriting basis, even though their weight on Aviva's overall group is much smaller compared to the life segment. The combined ratio was up compared to 2021 (negative for earnings) due to higher claims costs, justified by inflation and some weather effect.
The business segment that was most affected by weak capital markets was naturally its asset management unit, which reported lower assets under management mainly due to negative market movements. This led to lower revenue which was not offset by cost reductions, leading this unit to be the only one reporting a decreased on operating profit last year.
Aviva Investors (Aviva)
Aviva's overall costs decreased by 3% YoY to £2.8 billion, as the company continues to improve its efficiency and remains focused on cost discipline, despite headwinds from the inflationary environment. Due to the combination of higher top-line and good cost control, Aviva's operating profit amounted to £2.2 billion in the year, an increase of 35% YoY.
On the other hand, due to adverse market movements related to its investment portfolio, its reported loss for the year amounted to more than £1 billion, but this metric does not reflect the company's underlying business, thus its adjusted net income of £1.4 billion is the most relevant metric to use. Based on this, its return on equity was near 8%, and its adjusted earnings per share were close to £0.41.
At the end of 2022, Aviva's Solvency II ratio was 212%, which is way above its own internal target of being above 180%, showing that the company has a solid capital position that allows it to provide an attractive shareholder remuneration policy. Indeed, even after considering the dividend and share buyback, its solvency ratio would be 196%, still at a very solid level.
Regarding cash generation, it amounted to £1.8 billion in the year, up 11% YoY, which is also a key factor to provide a sustainable dividend over the long term. This happens because dividends are paid by centre liquidity at the holding level, with remittances from operating insurance companies within the group being the major funding source for centre liquidity. Its centre liquidity position amounted to about £2.2 billion at the end of February 2023, which is much higher than its internal target of about £1.5 billion, also explaining why Aviva decided to launch a new share buyback program.
Going forward, Aviva sees plenty of growth opportunities from aging demographics, to more people searching for private healthcare, beyond others, which should support its business growth over the coming years. The Street seems to agree that Aviva has positive growth prospects ahead given that current consensus is expecting the company to report a net income above £1.8 billion by 2025, which is also a strong support for a growing dividend .
Indeed, its dividend is expected to grow to £0.37 by 2025, which means its annual dividend is expected to grow by 6% annually during the next three years, which seems achievable considering Aviva's positive operating performance recently and its sound business fundamentals.
Conclusion
Aviva reported positive operating figures related to 2022 and also announced, as expected, a new share buyback program. This further enhances its shareholder remuneration policy that was already attractive based on Aviva's high-dividend yield. Its shares are currently trading at around book value and less than 8x forward earnings, making it a compelling income investment within the European insurance sector.
For further details see:
Aviva: Recent Earnings Support Attractive Shareholder Remuneration Policy