Insurance giant Live (LSE: AV) recently completed a 76 per 100 share consolidation as part of its plan to return £4.75 billion to investors.
The company has decided to consolidate the number of its outstanding shares after distributing £3.75 billion via a ‘B’ share programme. Under the scheme, shareholders received one “B” share for each ordinary share, and that special unit will be redeemed at £1 “before the end of May”. In addition to this return on capital, the company also repurchased £1 billion worth of shares.
Under pressure from activist hedge fund Cevian, the largest such fund in Europe, Aviva CEO Amanda Blanc is returning more cash to shareholders. She promised to raise the company’s dividend to 31p per share this year and 32.5p in 2023.
Based on these numbers, Aviva’s share price supports a post-consolidation forward dividend yield of 7.6%, making it one of the highest-earning stocks on the FTSE 100. counting the company’s recent special cash returns. The stock also looks relatively cheap. It trades at a forward price/earnings (p/e) multiple of around 7.1.
Yet investing is about more than picking stocks that look cheap. If it were that simple, we would all be rich. It’s not enough to know that a stock is cheap, we need to understand why.
Aviva stock price seems cheap, but is it really a bargain?
Aviva is a complex company to understand. At its core, it is a provider of life insurance and long-term (retirement) savings, but it also offers non-life insurance products, wealth management services and has a “closed book” of legacy fonts.
The company has struggled to streamline its operations in recent years, divesting £8bn of non-core business units. Most of the proceeds were returned to investors, although some was also used to reduce debt.
While these asset sales helped simplify the deal, Aviva remains a heavy beast with mixed growth prospects. This seems to be the reason the market is in no rush to buy the stock. Yes, the company returns a lot of money to shareholders, but life and non-life insurance has always been, and will continue to be, a slow and steady business.
It is also extremely difficult to analyze the performance of a long-term life insurer and long-term savings provider. Products sold today will be redeemed at some point in the future, and they require tedious calculations to ensure a profit. Even a slight change in interest rates can have a big impact on these numbers.
Aviva is trying to break with this model by developing its non-life insurance and wealth management branches. Non-life insurance or short-term insurance has a much shorter lifespan (as the name suggests). Policies are typically renewed annually, generating a more predictable and faster revenue stream for the business. There are also more opportunities to quickly adjust prices to reflect changing market conditions.
This is a beacon of hope for the company. In the first quarter of 2022, the group’s general insurance business recorded its best sales in a decade, as “people were drawn to the strength of the Aviva brand and the quality of our products”. General insurance sales increased 5% overall.
Unfortunately, wealth management turns out to be a more difficult problem to solve. Overall sales were down 3% year-on-year as total assets under management fell 1% to £150bn, mainly due to market volatility. Assets under management at the group’s Aviva Investors fund management arm fell 5% to £253bn year-on-year.
Management believes that wealth management will be a key growth area in the years to come as more and more retirees look for better ways to invest their money. To this end, Aviva decided to acquire Succession Wealth for £385 million.
Aviva’s strong brand lends itself to this strategy; the cost of doing business for wealth managers is becoming prohibitive due to the burden of regulation and the rising cost of liability insurance. With rising costs, many managers are withdrawing from the market, but there is growing customer demand for these services. This is where the business can create value. It has the size and scale to meet rising costs, and its brand is trusted by savers.
A dividend game with limited growth prospects
In my view, Aviva’s investment case is all about the company’s dividend. Its financial services portfolio generates a steady flow of cash, which management can return to investors.
This also appears to be the reason why Cevian decided to acquire a large stake in the company last year. As well as calling on the insurer to repay £5bn from the asset sale, the fund also claimed that Aviva had the leeway to increase its dividend to 45p per share within three years ( pre-consolidation). Although it has made progress towards this goal, current plans remain insufficient.
Nevertheless, further cost reduction measures are planned and, at the end of the first quarter, Aviva had a pro forma solvency ratio of 192%. That’s well above the 180% level at which he said he would consider returning the excess capital if there was no better case to reinvest the money.
Aviva looks like a cash cow, but investors looking for growth rather than income might be disappointed. Like one of the company’s retirement policies, an attractive level of income is offered, although capital growth may be more difficult to obtain.