The fall in banking shares following the Brexit vote is understandable, as there’s a real risk that London’s top banks could lose some of their access to European markets. But quite why insurance firms should all be marked down too isn’t at all clear.
Aviva (LSE: AV), in particular, was very quick to respond on the day after the vote, with an assurance that it “has conducted extensive analysis of the possible implications of a vote to leave the EU and considers it will have no significant operational impact on the company.” Yet Aviva shares promptly shed 22%, and though they’ve picked up a little since then, they were still down 13% by Wednesday’s close of business.
But Thursday’s first-half results, which highlighted a rise in profits and a lift to the interim dividend, gave the shares a boost — they stand 5.2% up at the time of writing, at 405p, and now just 9% down since referendum day.
Dividend boost
Aviva lived up to its promise to keep its dividend growing, hiking its first-half payment by 10% to 7.42p per share, after operating profit rose by 13% to £1,325m.
Chief executive Mark Wilson said: “The 10% increase in the dividend, up 32% since 2013, is another step towards our target payout ratio of 50% and underpins our confidence in delivering sustainable and growing returns“.
Solvency indicators came in slightly behind the same point last year but were still very strong, with a Solvency II capital surplus of £9.5bn and a coverage ratio of 174%. Mr Wilson described that as “toward the upper end of our working range.” I see no problems at all with Aviva’s balance sheet, especially with the company reporting cash remittances in the period of £752m, up from £495m.
Profits up
The acquisition of Friend Life last year has benefited Aviva’s bottom line, helping life insurance profits rise by 20% to £1,226m, with Friends Life also adding to Aviva’s asset management returns. General insurance profits, on the other hand, fell by 17% to £334m, largely due to the new Flood Re insurance levy and to claims arising from floods in France and fires in Canada. But the overall result looks eminently satisfactory.
Today’s results were pretty much in line with the current analysts’ consensus for a rebound in earnings per share following last year’s fall, together with a full-year dividend increase to around 23p per share for a 5.7% yield. Should the firm’s progressive dividend policy remain unchanged, we’re likely to see a dividend yield of around 6.4% in 2017.
Threats?
Analysts are putting out a strong buy consensus on Aviva shares at the moment, so what’s holding them back? It’s sure to be the general weak sentiment that has dominated since the Brexit vote, with indicators increasingly pointing to an economic slowdown and some suggesting a 50/50 chance of recession.
But Mark Wilson appears undeterred by such fears, adding “Aviva’s strong financial position and diversity mean we are well insulated from external events. We have deliberately designed Aviva to be resilient to a low interest rate environment.“
My own investment in Aviva is in the red right now — but I really do see Aviva shares on a forward P/E of under nine this year, dropping as low as eight on 2017 forecasts, and I feel that’s too cheap to ignore.
