The FTSE 100’s Hottest Dividend Picks: Aviva plc

Today I am explaining why I consider Aviva (LSE: AV) (NYSE: AV.US) to be a stellar income pick.

Payouts on the gallop

Aviva’s reputation as a go-to dividend provider has taken a whack in recent years, as the fallout of the 2008/2009 financial crisis and subsequent rebuilding has weighed on the balance sheet. Indeed, the insurance giant slashed the payout from 26pp in 2011 to just 19p the Avivafollowing year, and again to 15p in 2013.

But City analysts expect the business to get payouts rolling again in line with resurgent earnings growth. Following last year’s swing to earnings of 22p per share from losses of 11.2p in 2012, City analysts have pencilled in growth of 111% for this year to 46.5p. An additional 11% advance to 51.8p is forecast for 2015.

Against this promising backcloth, Aviva is anticipated to lift the dividend 11% to 16.6p per share in 2014, and a further 15% rise is predicted next year to 19p.

These projections create a yield of 3.4% and 3.9% for 2014 and 2015 respectively, well above a forward average of 3.2% for the FTSE 100 but which substantially lags a corresponding readout of 4.7% for the complete life insurance sector.

A secure dividend selection

With earnings expected to surge during the next 24 months, investors can take confidence that predicted payments will be realised. Indeed, dividend coverage runs are covered by earnings 2.8 times through to the close of 2015, well above the generally-regarded safety watermark of 2 times and above.

And Aviva’s “aim to deliver cash flow plus growth, with an emphasis on cash flow” should also boost confidence in future payouts, delivered by the firm’s extensive restructuring programme. Not only has the insurer taken the hatchet to expenses, but a steady stream of divestments — the business has shorn off divisions in the US, Italy, Turkey and South Korea alone in recent months — is also stripping out unnecessary costs and boosting the balance sheet.

Although Aviva’s medium-term yield projections lag those of the competition, I believe that the electric payout growth expected until the end of next year is a promising omen for the coming years. With the company continue to grab fresh custom — new business values leapt 10% during April-June — and group-wide transformation creating a more capital-efficient machine, I believe that dividends should continue to surge.

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Royston Wild has no position in any shares mentioned. The Motley Fool has no position in any of the shares mentioned.