As I write, the Aviva (LSE:AV) share price is around 428.5p. One of the most attractive features of Aviva shares is the dividend, which currently yields just over 5%. But I think there’s a better way to invest in Aviva.
Instead of buying Aviva’s common equity, I’m looking at buying preferred shares in the company. These trade under the ticker symbol (LSE:AV.A). Here’s why I think that Aviva’s preferred stock offers me a better way of investing in the company.
Preferred stock advantages
Unlike the common stock, Aviva’s preferred shares pay a fixed dividend. Twice each year, the company distributes 4.375p for each preferred share.
At current prices (146p for preferred shares), that’s a 6% yield. And the preferred status means that Aviva has to pay the dividend to its preferred stock holders before it pays any dividends to its common equity holders.
The dividend is also cumulative. So if the company doesn’t pay any dividends at all for a year, it has to make up for all of the missed preferred payments in full before it can pay common equity holders anything.
Aviva’s preferred stock therefore has a limited downside. The catch is that it also has a limited upside. While the company isn’t going to cut the dividend on its preferred stock, it also isn’t going to increase it either.
Preferred stock holders don’t participate in the growth of the company. So for an investor looking for a dividend that is going to increase over time, Aviva’s preferred stock is a bad choice.
The current Aviva share price for common equity means that the company’s preferred stock has a higher dividend yield than its common stock. And I think that the added security of the preferred makes it attractive.
A complicated business
Another advantage of Aviva’s preferred stock is that it’s easier to assess from an investment perspective. Evaluating the Aviva share price for buying common equity requires a detailed understanding of a complicated business.
With the preferred shares, I don’t need to know exactly how much the company will make. Since the dividend is fixed and has to be paid before common stock dividends, I just need to know that it will make enough money to pay that preferred dividend.
Aviva has a combined operating ratio of 90.7% in Canada and 94.3% in the UK and Ireland, which looks about average to me. It has a cost income ratio of 86%, which I think is underwhelming.
Management aims to improve both ratios, via a complicated restructuring process. Whether or not this will be successful is beyond my ability to predict with any confidence.
As far as I can see, Aviva also lacks a competitive advantage over other insurers. Switching costs are fairly low and brand loyalty in this industry is essentially non-existent.
All of these considerations would concern me if I owned the common stock. In order to invest in Aviva’s common equity, I’d need some view about how the company was going to develop over time and an idea of its competitive advantage. At the moment, Aviva is too complicated for me in this regard.
Owning the preferred stock is more straightforward. That’s why I’m looking past the Aviva share price and at the preferred stock. With a 6% yield, I’d buy it at these prices.
