Last year we saw investors beginning to rotate out of overvalued growth stocks and into value-oriented companies. This year, shareholder returns among FTSE 100 firms are projected to hit a record £86bn. Consequently, one dividend stock that’s at the top of my buy list this year is insurance giant Aviva (LSE: AV.).
Dividend visibility
What I particularly like about Aviva is that it has provided clear forward guidance on its dividend policy for both 2022 and 2023. This suggests to me that management is confident about the company’s future prospects.
For the financial year 2022, dividend payouts will total approximately £870m, equivalent to 31.5p per share. Two-thirds of this total is still to be paid.
In 2022-23, dividend per share (DPS) is expected to increase to 33p. Beyond that, it expects DPS to rise by 5%.
In recent years, Aviva has undergone significant streamlining, divesting itself of a number of non-core businesses. This has left it in a very strong capital position.
One way to measure a company’s capital strength is by means of the Solvency II coverage ratio. The higher the ratio the better an insurance company is able to weather extreme financial shocks. Aviva considers that coverage above 180% to be healthy. This figure currently stands at 215%.
A strong liquidity position is a huge positive for me. Excess capital on its balance sheet is likely to translate into additional shareholder returns by means of share buybacks and additional dividend payments.
Structural macro forces
Aviva operates in a number of high-growth areas. One key market I view as likely to see meteoric rise this decade is bulk purchase annuities (BPA). It occupies the number two spot in this market.
Trustees of defined benefit (also known as final salary) pension schemes face a number of challenges to ensure that they’re able to meet their financial obligations. Inflation risks, market volatility and improved life expectancy can put a huge strain on employers’ balance sheets. BPA is a vehicle that transfers such risks to a third party.
Aviva is also the largest provider of equity release mortgages. I expect this market to grow in the future as retirees seek to release equity from their homes to capitalise on house price inflation.
The increasing adoption of electric vehicles is a further structural tailwind. The company currently insures 12.5% of all such vehicles in the UK. A whole new insurance sector will emerge to meet this growing market need.
Major risks
One key risk with investing in an insurance company relates to the performance of its asset management business. A poor investment strategy will erode shareholder wealth. Market volatility, fund liquidity and client retention are additional related risks.
The company invests heavily in government and corporate debt. Bonds performed particularly poorly in 2022 following rapid rises in interest rates and the ill-fated mini-budget. As the economy slides into a likely recession in 2023, this could affect the value of its corporate bond portfolio.
However, I believe that the company is well positioned to grow shareholder wealth in the future. Its diverse portfolio, and well known brands provide it with a distinct competitive advantage. And the icing on the cake is that juicy 7.5% dividend yield. I intend to buy some of its shares for my portfolio.
