In my examination of what 2014 might have lined up for some of our top FTSE 100 shares, I’m casting my gaze towards FTSE 100 insurer Aviva (LSE: AV) (NYSE: AV.US) today.
Here’s Aviva’s recent performance, together with the latest consensus forecasts for this year and next:
| Dec | Pre-tax | EPS | Change | Dividend | Change | Yield | Cover |
|---|---|---|---|---|---|---|---|
| 2008 | -£2,368m | 62.9p | +19% | 33.0p | 8.5% | 1.9x | |
| 2009 | £2,022m | 45.1p | -28% | 24.0p | -27% | 6.0% | 1.9x |
| 2010 | £1,939m | 37.6p | -17% | 25.5p | +6% | 6.5% | 1.5x |
| 2011 | £373m | 11.1p | -70% | 26.0p | +2% | 8.6% | 0.4x |
| 2012 | £246m | -15.2p | n/a | 19.0p | -27% | 5.1% | -0.8x |
| 2013(f) | £1,290m | 43.8p | n/a | 14.9p | -22% | 3.6% | 2.9x |
| 2014(f) | £1,408m | 47.8p | +9% | 16.1p | +8% | 3.9% | 3.0x |
That looks like an example of an interesting phenomenon to me. We see earnings per share dropping as the economic downturn progresses, but dividends being maintained — with the yield rising as the share price stagnated, to the point where, in 2012, the dividend exceeded the firm’s earnings per share.
Now, the insurance business is a cyclical one, and in down years a company will still be able to pay a higher dividend from cash retained from previous years’ earnings (or from other sources) with confidence that earnings will happily cover the payouts over the longer term.
Stretch… snap!
But the combination of a recession in general, a crash in financial services, and a downturn for insurance specifically, things can get badly overstretched — and that’s what happened here. Aviva was left with little alternative but to rebase its dividend with effect from the second half of 2012 — and with hindsight, it was pretty inevitable. Aviva wasn’t the only one, of course, as RSA Insurance did the same thing.
The result of it all was a company in better shape for the future, and it came just as its economic fortunes were turning around.
Aviva is expected to return to strong earnings this year, with a further rise for 2014 on the cards. And though the dividend has been slashed, it’s still nicely ahead of the FTSE’s average of a little over 3% and looks set for a future path of more sustainable rises.
Nice recovery
The markets sat up and took notice as well, and since its low-point of 295p just after the 2012 full-year results were announced in March 2013, the share price has climbed by a very nice 47% to reach 434p.
In fact, I added Aviva to the Fools’ Beginners’ portfolio shortly after the slump at 321p — at the time I said “I think Aviva shareholders have been more shaken by the dividend cut and the shares have been oversold a little more fiercely” compared to RSA, and I’m pretty happy with the way things have gone even in the short time since.
The future?
So what do we have going forward?
Well, current forecasts put Aviva shares on a P/E for the year to December of under 10, which is a good deal lower than the FTSE’s long-term average of 14. And based on predictions for next year, that drops to less than 9, which I really think is too low. The only direction I can see is upwards.
Verdict: Back to sustainable growth in 2014!
