In the past 12 months, Aviva (LSE: AV.) shares have come alive and look to have finally managed to cast off the tag of being a ‘boring’ stock. However, with the share price now sitting at an 18-year high, the dividend yield has come down significantly. So are they still worth buying?
Q1 results
Looking at some of the headline numbers from its recent trading update, the insurance giant has picked up where it left off in 2024.
Its largest business, General Insurance, saw premiums rise by 9% to £2.9bn. Growth was strong both across personal and commercial lines.
The company’s partnership with Nationwide Building Society was a big driver for the 6% growth in UK personal lines premiums (eg car, home and travel). In commercial lines, the acquisition of Probitas, which provides it with access to the Lloyd’s of London insurance market, contributed toward the 17% growth.
Its portfolio is a majority-capital-light business today. Over the next two years it will be nearer 70% capital light. The acquisition of Direct Line Group will be a key driver of this increase as it unlocks synergies across the two businesses. At the moment the takeover’s being investigated by the Competition and Markets Authority. But I still expect the deal to be rubber stamped.
Dividend hikes
Over the past five years, Aviva’s returned £10bn in capital and dividends to shareholders. That represents about 62% of its current market-cap of £16bn. To me that highlights its shareholder-first approach to returns.
This year it intends to return two mid-single digit increases in the dividend cash cost. The first payment increase will reflect the organic growth across the business. Following the completion of the Direct Line Group deal, a second payment will be made. The total of these payouts is expected to more than offset the suspension of share buybacks in 2025.
From 2026, it expects to return to mid-single digit increase and to reinstate buybacks. The buybacks are important because the buyout deal will increase the total issued share capital.
Climate change
Hurricanes, floods, wildfires and other natural catastrophes linked to climate change present an emerging risk for Aviva.
Last year Canada, where it has a significant present, was the worst insured year for weather on record. Total losses for the insurance industry were over CA$8.5bn. These record losses fall on the heels of 2023 where Canadians made 8,000 claims across 17 natural catastrophes resulting in the business incurring losses of $200 million.
As these events become more frequent, the possibility of errors in underwriting leading to catastrophic losses can never be ruled out.
Despite such risks, there’s still so much to like about the business, not least huge growth opportunities across a number of its markets. The UK workplace pensions, advice and investments market are worth £1.8trn and growing at double digits. Insurance markets are growing rapidly too, off the back of growing populations and increasing requirements for commercial speciality insurance.
Consensus opinion across a group of analysts might indicate that the stock’s fairly priced today. But looking longer term, I remain optimistic about the prospects for the business. It remains one of my favoured picks and I intend to add to my position again soon.
