The new chairman hasn't ruled it out.
The newly appointed executive chairman of Aviva (LSE: AV) has told investors that he is trying to save the dividend. That's a clear message that it is at risk. With the yield at 9%, the payout is clearly in the danger zone.
But John McFarlane's frankness may mark a new era at the only composite insurer in the FTSE 100 (UKX). It comes with the announcement of a new strategy, a new management line-up and moves that show the new team means business.
If McFarlane can pull off his plans and maintain the payout, then shareholders will finally see the value in the company realised. It's been a nerve-wracking 12 months, with the shares down 35% while the FTSE 100 has dropped just 6%.
Mess
There's no question that Aviva is in a mess. Its own management describes it as too complex and bureaucratic, with weaker and more volatile capital than its peers, overly exposed to traditional capital intensive products in low growth markets and to the eurozone in particular, and with a history of too many changes of strategy, unsuccessful restructurings and opaque communication.
To turn the business -- any business -- around requires capable management, a sound strategy, effective execution of the strategy and a forgiving external environment. Recent developments suggest the first three are in place, though the company remains at the mercy of the eurozone.
Management
McFarland has certainly turned in an impressive performance in his first two months. Parachuted in as executive deputy chairman in May after former CEO Andrew Moss was ousted in the 'Shareholder Spring' that saw the departure of several overpaid but under-performing FTSE 100 executives, he became executive chairman this month.
Also significant is the appointment of David McMillan, former head of UK and Ireland, to the post of director of group transformation, charged with implementing the new plan. In plain words, he is interim CEO.
McFarlane's fast action forestalls the danger of the Aviva being seen as rudderless at a vulnerable time, which otherwise could have made it a takeover candidate. But it complicates the challenge of finding a permanent CEO, who will have to be happy implementing the course of action already set out.
Strategy
The strategy is one of significant retrenchment. The aim is to focus on fewer businesses where higher returns can be achieved. Aviva has undertaken a textbook analysis of its 58 business segments and identified 16 of them that consume 38% of its capital but contribute just 18% of its operating profit after tax. These will be sold or rundown.
A relatively low and volatile capital base is one of the reasons behind Aviva's low share price. It will now target internal economic capital levels of 160-175% of the minimum required. The aim is to achieve this through disposals and better capital rationing. A dividend cut or raising new equity would be the last resort.
And the insurer aims to take the knife to middle management, cutting down the layers between CEO and operational staff from nine to five to save £400 million from the end of 2011. Total staff costs were £1.3bn last year, so that's a sizeable challenge.
Disposals
The new strategy was immediately followed by announcement of the sale of half of Aviva's remaining holding in Delta Lloyd, which is listed on the NYSE Euronext Amsterdam exchange. That yielded £380 million, but more importantly reduced the holding below 20%, where it will have a less volatile impact on Aviva's capital.
Reuters also reported that the sale of Aviva's Malaysian joint venture, which is expected to raise about $500 million, is progressing well with four potential buyers through to the second stage.
The big question mark is Aviva's US operation. Bought for £2 billion in 2006, if McFarlane can pull off a quick sale then it would transform Aviva's capital position.
Eurozone
But, of course, the external environment is out of the company's control. It is significantly exposed to the eurozone, both through the amount of business it conducts in France, Spain and Italy, and also in its investments. Its share price often acts as a barometer of sentiment towards the region.
So a blow-up in the eurozone would spell disaster for the company. Barring that, it looks as if the company might just get away with maintaining the payout.
But there's still a real risk of a cut. Aviva is a racy share. For widows, orphans and those of the more nervous disposition there are safer bets on the FTSE 100 that still have juicy yields.
Standard Life (LSE: SL) and Legal and General (LSE: LGEN), both life assurers with a long heritage, yield 5.9% and 5.1% respectively. That's a respectable payout from companies that have much less downside risk than Aviva, albeit they lack Aviva's recovery potential.
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Further Investment Opportunities
> Tony has shares in Aviva but no other stocks mentioned in this article.
