There’s a lot for me to like about Aviva (LSE: AV) shares now. And one of the top attractions is the generous-looking shareholder dividend. With the share price near 440p, the forward-looking yield is just above 8% for 2023.
However, a high dividend yield can sometimes mean the market is worried about something. Fat dividends can occur because a company’s valuation is depressed. And in the case of Aviva, caution could be the watchword because of cyclicality.
Robust forward-looking dividend estimates
The firm offers savings, retirement and insurance products. And rightly or wrongly, I reckon there’s a general perception the industry could struggle in lean economic times. Even the company’s own directors play a cautious hand. For example, they were quick to axe the final dividend of 2019 when the pandemic struck.
Of course, Aviva wasn’t alone in binning shareholder dividends when Covid-19 led to lockdowns. But some businesses merely postponed dividends and paid them to shareholders later. And others paid dividends right through the coronavirus crisis.
I think Aviva’s reaction through the pandemic demonstrated its weakness, whereas some other businesses proved their strength. Indeed, not only did Aviva trash its final dividend of 2019, it also paid lower subsequent dividends. Prior to the pandemic, steady annual rises saw the total dividend peak at 39.5p per share for 2018. But for 2020, the total for the year was just 27.6p per share.
In fairness, Aviva has jumped right back into the groove of raising its payout a bit each year since. The payment for 2021 was 5% higher. And City analysts predict a rise of just over 13% in the total dividend for the current year and around 9% for 2023.
A positive outlook
The company delivered its half-year report on 10 August. And the headline was: “Continuing momentum with strong first-half results demonstrating benefits of diversified business model.”
Looking ahead, the directors said they’re “confident” about the outlook for the rest of 2022 despite a “challenging market backdrop”. Chief executive Amanda Blanc reflected on an “excellent” six months for Aviva citing higher sales, larger operating profits and a stronger financial position. And she said the scale and diversification of the business gives “resilience and opportunity” and the ability to withstand the current challenging economic climate.
With operating profit 14% higher year on year, there’s little doubt trading has been robust. And Aviva has found other ways to reward shareholders beyond the dividend. For example, in May it returned capital of £3.75bn to shareholders. And that worked out at a payment of 101.69p per ordinary share. Blanc said the move arose because of the company’s “successful divestment programme”.
Prior to that, Aviva completed a £1bn share buyback programme in March. And it plans to announce another buyback with the full-year results for 2022.
Despite my mild reservations about cyclicality, the firm appears to be flush with cash and trading well. So, I think I should buy shares in Aviva now.
