Despite cutting its dividend, Aviva looks like good value.
I've taken a fancy to FTSE100 share Aviva (LSE: AV), distinguished on two counts by being both the UK's largest insurer and possibly its only palindromic one. As well as appearing to be a fine long term high yield portfolio play, there may be some mileage here for short-term value players with the price being somewhat depressed of late. I've had a stake for a while but increased it recently as the price fell back.
I was alerted to it by a yield scan of the index. Specifically, at a price of 391p and with a dividend forecast for the year to 31/12/10 of 24.8p, that delivers an anticipated yield of 6.3% which puts it close to the top of the table. And that 2010 dividend forecast is a decent 15.6% up on the 2009 expectation of 21.5p, the latter making a yield of 5.5%.
What's the catch?
The question you gotta ask yourself though as with any yield play is whether there are good reasons for the high yield. And with Aviva I just can't see any that are sufficiently negative in my view to justify this rating, so I think it's too cheap at the current level. I believe the price owes more to unjustified poor sentiment than any flaw in the fundies.
The company, which had been increasing its payout for some years, cut its dividend in the current recession. The high point reached was 33p in their 2007 year and this was maintained in 2008. However it will fall for 2009, the forecast being as above with the interim to 30/6/09 already having been slashed by 31% to 9p. Having made its dividend cut though, I am encouraged by the good rise now forecast from the 2009 low.
The latest information is contained in the third-quarter trading statement published in November. This referred to a considerable strengthening of the balance sheet -- important in these credit crunched times -- which will occur from the sale of an Australian subsidiary and the partial float of their Dutch business, Delta Lloyd.
In addition, market improvements have occurred with their investments and the result is that net assets on a normal accounting basis stood at 409p per share at 30/09/09 or 520p on the MCEV basis. The latter, Market Consistent Embedded Value, is a method peculiar to insurance companies. Whichever figure you use, the share price is at a considerable discount to it.
The downside in the statement is the fall in life and savings sales to which reference had been made earlier. Not unexpectedly, people are far less inclined to buy life insurance etc. in a recession. The company reports though an improvement in margins by concentrating on higher value business. They report also a reduced volume on the general side but with a combined ratio for the nine months of 98%. This ratio for general insurance shows the claims and expenses as a proportion of premiums received. Thus anything below 100% represents profits.
The trouble with insurance
Insurance companies are difficult to value due to their complexity. Eps, which can take several forms, is perhaps less of an indicator here than it is in other types of business, so I look more to yield and asset value as indicators. And those are both attractive for Aviva right now. The assets are sensitive to the markets and the share price is geared to that, so any relapse will hit the valuation. I avoid usually the business of predicting market direction so I don't know what may happen over the short term, that's a risk investors in this share will have to take and it's one I am taking as I'm in it.
As you'd expect, the recession has taken its toll on the share price with the 52 week high/low at 467/163p which shows also the good recovery from the low point. But it was way higher than that a couple years earlier, getting to over 800p. That does not of course presume that the price must get back there, there's no divine right of any share to any particular price, it's just that under the right sentiment and fundamentals, the market is prepared to rate it that highly.
On the near future, the third quarter directorspeak commented that:
"Our total profitability outlook for 2009 remains good. Management actions have been taken across the business to maintain and improve margins where possible and reduce costs. We have seen a strong rebound in financial markets which, if sustained to the end of the year, will have a positive effect on our overall profits."
This is very encouraging comment for a financial business in the current climate. If it looks good for 2009, my guess is that it will look good for 2010 too, barring a further market collapse. On these grounds, I believe it's too cheap.
I'd like to wish all my readers a nice Christmas. It's a time for being with relatives but it does have some good features as well. I hope you enjoy them.
More from Stephen Bland:
Stephen holds Aviva.
