On the face of it, March 2013 was not a good time for investors in Aviva (LSE: AV) (NYSE:AV.US). Its final dividend was cut from 26p in the prior year to 19p; a fall of 27%. As you may expect, shares nosedived, although their fall of 12.5% does not sound quite as bad as it felt for shareholders at the time.
The reason for the dividend being cut was simply that it was unsustainable. Aviva was not paying the dividend out of operating cash flow and, as such, its dividend was not covered and unless cash flow increased it would one day have had little choice but to cut its dividend. So, a relatively new CEO took the decision to take some short-term pain for long-term gain.
The cutting of the dividend coincided with a renewed push to reduce the company’s leverage ratio (which had increased partly as a result of the sales of various assets) and also to improve the diversity, cash generation and, ultimately, growth of the business. Essentially, there seemed little point in ignoring the problems the company was facing in favour of maintaining a very generous dividend payment.
So, in my view, the decision to cut the dividend was a wise one for it gave the company the resources and mandate to make the necessary adjustments so as to ensure the long-term success of the business. In addition, shares are now trading beyond the 360p level they were on the day prior to the dividend cut announcement, so the market seems to have (to some extent) bought into the CEO’s plan.
Moreover, Aviva’s yield remains highly attractive: it is the seventh highest-yielding stock in the FTSE 100 and currently offers a yield of 5.1%. With the best no-notice bank accounts offering little over 2%, a major insurance player that has a renewed and sensible strategy and that offers a yield of more than 2.5 times the best savings account is a winner with me.
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> Peter owns shares in Aviva.
