Insurance company Aviva (LSE: AV) has a mixed record when it comes to shareholder payouts. The Aviva dividend was cut as recently as five years ago. But the company has been growing its payout per share handily in recent years and the yield now stands at 5.8%.
So, if someone bought 1,000 Aviva shares today, what might they hope to earn in dividends over the coming decade?
Impressive growth outlook
In recent years, the Aviva dividend per share has been growing steadily. This year, for example, saw the interim dividend per share grow 10%.
In fact, the dividend is now bigger than it was before that cutback in 2020.
A 10% annual growth rate for a mature company’s dividend is hard to sustain.
However, the company aims to keep growing its payout per share annually. For the sake of illustration, I will presume a 5% annual growth rate in the dividend per share over the coming decade.
If that comes to pass, a decade from now, the full-year Aviva dividend per share ought to be around 55p.
A decade of dividends?
In the coming decade, such a 5% annual growth rate would mean a single Aviva share earns around £4.49 in dividends.
So, someone who owns 1,000 shares would be in line to earn around £4,490. The Aviva share price is about £6.39 currently, so purchasing 1,000 shares would cost roughly £6,390.
What about share price growth?
The past five years have seen the Aviva share price move up 91%. Past performance is not necessarily a guide to what will happen in future, though.
Aviva’s current price-to-earnings (P/E) ratio of 29 looks costly to me.
However, it has also improved its business performance in recent years, so some investors may expect that earnings could grow in years to come. In that case, the prospective valuation may be more attractive than the current P/E ratio suggests.
Strong income potential
Of course, things may turn out less rosily.
That dividend cut in 2020 is a reminder that payouts are never guaranteed to last, let alone grow, at any company.
In recent years, Aviva has streamlined its business to focus more on its core UK market. Its acquisition of rival Direct Line is an example of that strategy being put into action.
This approach has given Aviva economies of scale. It is already the largest insurer in Britain and so is playing to its strengths.
But it also brings a risk, in making Aviva more reliant than before on its home market. Its strong position makes it an attractive target for rivals who want to take some of its market share. If they compete on price to try and gain market share, that could hurt Aviva’s profitability.
Still, the dividend outlook for Aviva remains strong. While I do not think its share price is cheap, I see it as reasonable given the business prospects and see this as a share investors should consider.
