Aviva's Year Of Progress

Stephen Bland looks at figures from two value picks -- Aviva and Carillion.

I have news on two value portfolio shares today, Carillion and especially Aviva because of the heavily overweight stake I decided to take in this share. Both companies have reported on their results for the year to 31/12/09.

I'll deal with Aviva as the biggest one first, something somebody advised me aeons ago to do though he was talking about the best course of action in a punch up.

A year of progress?

In their own words, 2009 was "a year of significant progress with a strong return to profit." However that "progress" involved a cut dividend for the year of 24p in total. If that's progress, I wonder what they consider to be regress. 

The payout is down by 27% on last year's 33p, but it's no surprise because this was signalled some time ago. The interim was already down by 25% and the lowered dividend that was expected for 2009 is something I took into account when going into the share both originally and when increasing the stake later. The final is 15p going ex dividend on 24 March, with payment on 17 May if you want to catch it.

I've started my review with the dividend because this is the principal case for my play in Aviva. I believe that its yield is unsustainably high and nothing in these results has altered my view. Strengthened it if anything. At 381p, the historical yield is 6.3%. The forecast dividend for 2010 is now 25.3p making an anticipated yield of 6.6% and for 2011 it is 27.4p to give 7.2%.

Reality playing catch up

Whilst there may have been reason to doubt Aviva in the depths of the financial crisis, like any share at the time that had anything to do with banking or insurance etc., I think that is firmly behind us as far as this company goes. It is now making a profit following losses in 2008 though net assets are down. 

Yet despite the recovery in the share price since its low point I don't think this has reflected its new reality at all. The news is pretty good in most areas of the business and sooner or later the yield is very likely to fall. It just doesn't make sense for a big cap like this to be yielding so far above the market. Moreover, the yield is forecast to grow adding fuel to my belief.

Of course the yield could fall by a cut dividend but having already done this in 2009, it is unlikely to happen again in the next few years assuming they continue to recover, as the bullish noises they are making indicate. Consequently the most likely reason for a yield fall is a price rise. I can't give a time scale for this to happen, value always requires great patience, but I'm convinced it will out as a result of a yield correction.

The shares presently stand at around my average purchase price, therefore nothing doing yet so I'm doing nothing. Meanwhile there's the fat and forecast growing yield to enjoy while we're waiting which incidentally makes it a decent HYP share too.

Carillion looking strong

Carillion's figures look good. Whilst it's no asset play in having a large negative net tangibles situation, it is firing on just about every other cylinder. With improved operating margins, basic eps is up 18% to 33.4p and the dividend for the year is up 12% to 14.6p. There was net cash at 31/12/09 of about £25m compared with net debt of £227m last year.

With the shares at 292p that's a historical P/E of 8.7 and yield of 5.0%. The forecast eps for 2010 on a normalised basis is 38.2p for a forward P/E of 7.6 with a hardly changed dividend of 14.7p. That dividend forecast looks too low to me but anyway it makes an anticipated yield of 5.0%.

The directorspeak makes encouraging outlook comments, referring to a stable high quality order book of some £17.7bn and an excellent pipeline of probable orders and contract opportunities. Despite a challenging looking 2010 they believe they will make good progress.

Looks good to me and with the fundies continuing to appeal I think the share is still too cheap at only slightly above its entry price here of 277p. Not outed yet.

The value portfolio now

Here's the current picture. One point worth mentioning is that Moneysupermarket has just gone ex dividend, that large payout of 7.11p representing about 10% of the share price, which as expected fell immediately by most of this payout. 

At present the worst performer is Dart and best is Mucklow. Overall I'm up about 11% but that excludes dividends which would have added a nice dollop of cash given that many of these shares have high yields but I'm too indolent to record them. It's very early days though for a value portfolio. You have to assume years though if a share outs earlier, well fine.

More from Stephen Bland:

• Money, Property And Dividends
• BAE Systems Update
• The Cash Goes In

Of the shares mentioned, Stephen holds Aviva, BAE Systems and De La Rue.