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Why I’d buy 8%-yielder Aviva for my ISA after this news

When shopping for high-yield dividend stocks, it’s important to recognise which stocks have affordable payouts and which ones are due for a cut. I believe Aviva (LSE: AV) can afford to maintain its dividend, which currently provides an 8% yield. In this piece, I’ll explain why I think this FTSE 100 insurer offers great value at the moment.

Good numbers, but no growth

Aviva has a problem. It’s profitable, healthy and pays generous dividends. But unlike rivals such as Legal & General and Prudential, it can’t seem to find a way to deliver consistent growth. This is why the shares have traded cheaply for years, despite offering a temptingly high dividend yield.

Last week’s results confirmed that 2018 delivered more of the same. Operating profit rose by 2% to £3,116m. The value of new business — a measure of sales — also rose by 2%.

Dividend investors were placated with a 9.5% increase in the payout to 30p per share. That’s equivalent to a payout of about £1.2bn. A look at the group’s cash flow statement tells me this payout should be comfortably covered by free cash flow, which totalled about £4.9bn last year.

Despite this neutral picture, the shares fell by nearly 5% when the firm’s results hit the newswires recently. Why was this?

New boss, new plans

After five months without a leader, Aviva has a new boss, chief executive Maurice Tulloch. He’s s a 27-year company veteran whose previous role was head of the group’s international insurance division.

Last week’s results revealed two early changes. The first is that debt reduction will now take priority over buybacks. Debt has fallen by £1.4bn over the last two years and management is targeting a further reduction of £1.5bn by 2022. This should save £90m in interest payments.

The second change is the dividend policy is being changed to a progressive payout. That means the company will aim for consistent, sustainable growth, rather than paying out a fixed percentage of profits each year.

Chairman Sir Adrian Montague says the company is committed to maintaining the dividend, so I don’t think this change is likely to signal a cut.

Looking ahead, some analysts have suggested that Tulloch might want to consider selling some of the group’s international businesses. It’s too soon to say, but this approach could generate significant shareholder returns.

Why I’d keep buying

Aviva’s large UK life insurance business is fairly mature and unlikely to become a growth machine. But there are growth opportunities, such as bulk annuities and workplace pensions. And the group’s Asian business is growing much faster, albeit from a smaller base.

I believe these concerns are already reflected in the share price. As I write, they’re trading below close to their net asset value of 424p per share. Combine this with a forecast dividend yield of 7.9% and a 2019 forecast price/earnings ratio of 6.8, and it looks to me like the market is pricing in zero growth. Forever.

I don’t think that’s realistic. History suggests eventually the value in this business will be realised. In the meantime, I believe the shares look priced to buy. I’m happy to keep collecting this near-8% dividend yield inside the tax-free shelter of my Stocks and Shares ISA.

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Roland Head owns shares of Aviva. The Motley Fool UK has recommended Prudential. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.