As we sail into the last few months of 2024, dividend-hungry investors are naturally on the prowl for companies with lucrative yields. Enter Aviva (LSE:AV.), the insurance titan that constantly turns heads with its mouth-watering 7% dividend yield. But is this FTSE 100 stalwart the one to watch for passive-income seekers? Let’s dive in and see if the company is as rock-solid as its 328-year heritage suggests.
The dividend
Firstly, let’s address the elephant in the room: that eye-popping 7% yield. In a world where many high street savings accounts are still offering peanuts, the company’s dividend looks like a veritable feast. But as any seasoned investor knows, if something looks too good to be true, it usually is. So, is Aviva’s dividend a mirage or an oasis?
The good news is that the firm’s financials are looking increasingly robust. The company swung back to profitability in 2023 after some challenging years, and analysts are forecasting earnings growth of 9% annually. This bodes well for the sustainability of that impressive dividend.
Undervalued?
But for me, here’s where it gets really interesting. The shares are currently trading at a whopping 42% discount to their estimated fair value, based on discounted cash flow (DCF) calculations. Although such returns are far from guaranteed, this gap suggests the market might be seriously undervaluing the future earnings potential, especially considering the company’s recent cost-cutting measures and restructuring initiatives.
The shares have already shown some zip, climbing 18% over the past year and handily outperforming competition in the wider insurance sector, which actually declined by an average of 10% in the same period. This could be a sign that larger players in the market are starting to consider the company’s potential.
Risks
Now, let’s address the less impressive elements of the business: that lofty 89% payout ratio. Typically, such a high percentage would set alarm bells ringing, as it leaves little wiggle room if business conditions sour. However, the firm’s strong capital position (with a solvency ratio of 206%) provides a comforting buffer. The company’s diverse business mix across life insurance, general insurance, and asset management also helps spread the risk.
The insurance sector faces numerous difficulties from increased regulation, climate change-related claims, and the ongoing cost-of-living squeeze. But I think management seems well-positioned to weather these storms, with strong branding, market-leading positions, and ongoing digital transformation efforts.
Ticks all my boxes
So, is Aviva my favourite passive income pick for 2024? It certainly ticks a lot of boxes. Although there are plenty of risks, I feel that the combination of a high yield, potentially undervalued share price, and improving business fundamentals makes it an attractive proposition for income-seeking investors willing to accept some short-term volatility. I’ll be adding shares at the next opportunity.
