G A Chester argues the odds have swung in favour of Aviva plc (LON:AV) cutting its dividend.
Will it or won't it?
If you've been following the fortunes of FTSE 100 insurance group Aviva (LSE: AV) (NYSE: AV.US) over the past few years, you'll probably know what the question refers to without my mentioning the words 'dividend' and 'cut'.
If you haven't been following Aviva, the will-it-or-won't-it conundrum has been rolling around because Aviva's dividend yield has been persistently more than double the average yield of the FTSE 100. Such a yield indicates Mr Market is pricing the company for a cut. So far, it hasn't happened.
Rising dividend, mammoth yield
Aviva raised its dividend by 6% to 25.5p in 2010 and by 2% to 26p in 2011. For 2012, the company has paid an interim dividend at the same level as 2011, and most analysts are expecting the board to declare a flat final dividend when the company announces its annual results on 7 March.
At a current share price of 355p, Aviva continues to offer a mammoth yield -- 7.3% -- if the dividend is maintained at 26p.
However, as seasoned dividend watchers will know, only two things can happen when the yield is as high as Aviva's: either the share price rises dramatically to compress the yield closer to the market average, or the dividend gets cut. More often than not it's the latter.
In the balance
On the side of the scales for Aviva maintaining the dividend is the fact that, while the dividend was not covered by earnings in 2011, the analyst consensus forecast for 2012 is that it will be. On the cut-risk side, the consensus masks wildly differing individual forecasts, showing just how little idea anybody really has about Aviva's earnings right now.
Another thing to put on the cut-risk side of the scales is the arrival of a new chief executive, Mark Wilson, seven weeks ago. Mr Wilson wouldn't be the first CEO who was tempted to rebase the dividend in these circumstances -- and then be able to grow it nicely on his own watch.
The final negative, which I think now tips the balance in favour of Aviva cutting its dividend, emerged this week: fellow blue-chip insurer RSA Insurance Group slashed its dividend by 33%, providing Aviva's board with a handy precedent.
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> G A Chester does not own shares in any of the companies mentioned in this article.