Does Aviva plc Pass My Triple Yield Test?


Like most private investors, I drip-feed money from my earnings into my investment account each month. To stay fully invested, I need to make regular purchases, regardless of the market’s latest gyrations.

However, the FTSE 100 is up 78%on its March 2009 low, and the wider market is no longer cheap. It’s getting harder to find shares that meet my criteria for affordability.

In this article, I’m going to run my investing eye over Aviva (LSE: AV) (NYSE: AV.US), to see if it might fit the bill.

The triple yield test

Today’s low interest rates mean that shares have become some of the most attractive income-bearing investments available.

To gauge the affordability of a share for my portfolio, I like to look at three key trailing yield figures –the dividend, earnings and free cash flow yields. I call this my triple yield test:

Aviva Value
Current share price 469p
Dividend yield 3.1%
Earnings yield -0.5%
Free cash flow yield 7.1%
FTSE 100 average dividend yield 2.8%
FTSE 100 earnings yield 5.7%
Instant access cash savings rate 1.5%
UK 10yr govt bond yield 2.8%

A share’s earnings yield is simply the inverse of its P/E ratio. Aviva’s trailing earnings yield is negative, as it has reported a loss for the last 12 months (H2 2012 and H1 2013), but the firm’s full-year results are due on 6 March, and Aviva is expected to report earnings of 41.6p per share, giving a prospective earnings yield of 8.9%, at the current share price.

Aviva’s share price has risen by 31% over the last year, reducing its dividend yield to a fairly average 3.1%. However, Aviva has managed to maintain strong cash flows, and its free cash flow yield of 7.1% suggests that CEO Mark Wilson’s focus on cash flow is paying off, and could support long-term dividend growth.

Is Aviva a buy?

Aviva is expected to have been hit hard by this winter’s widespread flooding. A report by Bank of America Merrill Lynch this week forecast that Aviva will face a loss of around £170m from the floods. However, a separate report published by Goldman Sachs suggests that Aviva’s reinsurance cover will limit losses to £150m, which while painful, shouldn’t do any lasting damage to Aviva’s turnaround plan.

Aviva is expected to increase its total dividend by 2.7% to 15.0p this year, giving a prospective yield of 3.2%. Although this is only a fraction of the yield which the firm used to provide, I believe that Aviva is a buy, as it is increasingly well-positioned to deliver stable long-term growth, and on a 2013 forecast P/E of 11.5, doesn’t look too expensive.

A trustworthy dividend?

Although Aviva's current dividend looks safe enough today, but long-term shareholders will remember that the firm has cut its payout several times before.

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> Roland owns shares in Aviva but not in any of the other companies mentioned in this article.