You can’t go wrong with Aviva (LSE: AV), in my opinion. Now the company has built itself into the UK’s largest retirement savings provider by acquiring peer Friends Life, the enlarged group is well placed to profit from the UK’s ageing population.
The acquisition of Friends Life also helped Aviva rebuild its balance sheet. Indeed, the group now has one of the strongest balance sheets in the sector. After completing the merger, Aviva’s management reported that the company’s economic capital surplus had risen to £10.8bn, up 35% from the figure of £8bn as reported last year.
Plenty of capital
Aviva’s £10.8bn capital surplus covers the company’s commitments by more than 170%, meaning that the group insulated from any sudden shocks. What’s more, Aviva’s own analysts have stress-tested the company’s balance sheet and believe that, even after a 20% fall in equity values, the group’s economic capital coverage ratio will remain above 170%.
Further, it’s estimated that as a result of the Friends Life merger, Aviva’s cash flow will increase by an additional £600m per annum by 2017. These numbers have given Aviva’s management the confidence to hike the company’s dividend payout by 15% when it announced first-half results at the beginning of August.
City analysts believe that this dividend growth is set to continue for the foreseeable future. Analysts have pencilled in dividend growth of 20% for next year and 15% the year after. These forecasts suggest that based on today’s prices Aviva’s shares will support a yield of 5.3% next year and 6.1% during 2017.
So all in all, Aviva’s dividend growth will give your portfolio a much-needed income boost. However, Aviva’s not the only company that’s planning to boost cash returns to investors.
ARM Holdings (LSE: ARM) currently trades at a forward P/E of 30.7 and even though City analysts expect the company’s earnings per share to grow by 69% this year, it doesn’t look as if there’s much upside in the company’s shares. What’s more, ARM only offers a dividend yield of 0.9%.
Still, City analysts expect ARM to jack up its cash returns to shareholders going forward. And with £904m of cash on its balance sheet, ARM has plenty of room to boost its dividend payout. Moreover, City analysts are forecasting that ARM will generate a 3.5% cash flow yield next year, rising to 6% by 2020. So, the company’s cash balance is only going to expand over the next few years.
A new chief financial officer has also increased the odds of ARM improving shareholder returns. Indeed, new CFO Chris Kennedy previously worked at easyJet where he oversaw a series of capital returns. If ARM returned just 50%, or £450m of its cash pile to shareholders, investors could be in line for a special payout of 32p per share.
Aviva is already an income champion, and ARM has the potential to follow suit.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended ARM Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.