The Aviva share price (LSE: AV.) has come under a lot of pressure recently. Year to date, the stock is down 13%. As its share price has been falling, so its dividend yield has been rising. It’s now one of only a handful of stocks in the FTSE 100 that offer twice the rate of a 10-year government bond.
Growing dividend
Investing in a company whose yield is growing solely as a result of a falling share price, rarely makes a good investment. But I don’t see Aviva in this light.
It possesses a highly diversified model that continues to see impressive growth across key product lines.
In 2022, it bought 50 bulk purchase annuities (BPA) onto its books. Premiums are expected to total £4.4bn over the lifetime of these contracts. BPA volumes for the most recent quarter were up 26% to £1.1bn and included an £850m deal with Arcadia.
Such a positive outlook for future cash generation supports my belief in the sustainability of the dividend. Analysts agree with me. At today’s share price, the yield is estimated to hit 9.4% by 2025.
Structural drivers
Operating across insurance, wealth and retirement, I see massive opportunities for the company in the years ahead.
Honing in on the retirement sector, it’s estimated that by 2039, some 25% of the UK population will be over 65. Against this backdrop, increasing pressure on public finances together with longer life expectancy is forcing governments to raise the state pension age.
As the nature of retirement evolves, individuals are becoming much more active participants taking greater responsibility for their financial journey toward retirement.
These trends are having an impact on its Wealth business too. We’re seeing an increasing trend toward the democratisation of financial advice. The traditional model is giving way to the likes of robo-guidance and other digital solutions.
A market-leading position across individual annuities, workplace pensions, equity release and BPA means the company is well positioned for growth into the future.
Risks
The market volatility witnessed since central banks began raising interest rates continues to hurt its wealth business. The net movement of cash through its investment platform was down 50% compared to the same period last year.
The acquisition of Succession Wealth in 2022 was meant to help it gain a greater foothold in the independent advice market. However, to date that hasn’t fed into an increase in assets under management. It intends to do a deep dive into this area of the market later this year. I’ll be keen to understand its plans for this part of the business.
A second area of concern for me relates to the bond market. Aviva, like all insurance businesses, has a large portfolio of assets, a significant portion of which is invested in government and corporate bonds.
Rising interest rates hit the treasury market in 2022. Yields on the key 10-year government bond (known as a gilt) are beginning to rise again. Rising yields mean that prices fall, impacting the value of its overall portfolio.
Despite these risks, with structural tailwinds providing long-term growth opportunities, I think the depressed Aviva share price is presenting investors with the potential for both capital and dividend growth in the years ahead.
