Aviva: higher dividend payouts to come

Aviva dividend forecast 2018

I very briefly covered Aviva last week, in my article are these the four best FTSE 100 5% dividend payers right now?’ I wrote at the time that Aviva has lifted its dividend considerably in recent years, yet the stock’s low P/E and attractive dividend yield suggests that the market has not yet acknowledged the turnaround story here.

The insurer has released an announcement today, and it’s great news for dividend investors.

Additional returns to shareholders


“Over the last four years Aviva’s financial and strategic position has been transformed. The capital surplus has tripled; the group has been streamlined and Aviva is now focused on markets where it has high quality franchises and is gaining market share.

As a result Aviva is upgrading the financial objectives it set out previously. Specifically:

Growth: targeting higher than mid-single digit percentage growth annually in IFRS operating earnings per share from 2019;

Cash: remittance target increased from 7 billion to 8 billion, allowing Aviva to deploy 3 billion of excess cash over 2018 and 2019. This is expected to be used to repay 900 million of debt in 2018 and fund bolt-on acquisitions and additional returns to investors;

Dividend: pay-out ratio target increased to 55-60% of operating EPS by 2020, underpinned by improved earnings quality and cash flows from Aviva’s businesses which are becoming less capital-intensive.”

Chief Executive Mark Wilson, said:

We are upgrading our cash flow and growth targets. After a few years of restructuring, our businesses are now high quality and we expect good, sustainable growth from each of them. We have improved the consistency and quality of our profits and so we are raising our expectations for earnings growth to more than 5% annually from 2019 onwards.

We have significant surplus capital and cash and this means we will have 3 billion of excess cash to deploy in 2018 and 2019, 2 billion of which we plan to deploy next year. In 2018 we expect to use our excess cash to pay down 900 million of expensive debt, return capital to investors and invest in growing our business, both organically and through acquisitions.

The quality of our earnings has improved by 15 to 20% and with lower debt costs and stronger than expected cash flows, it is appropriate to raise our target dividend pay-out ratio to 55-60% by 2020.

Cash cow

This is a great statement from Aviva, and particularly pleasing for dividend investors. The company is set to deploy a considerable amount of excess capital over 2018-2019 and as a result, investors are likely to receive some formidable dividends. An increase in the payout ratio is another plus.

2017/2018 dividend forecasts

Right now, it’s too early to tell exactly how large Aviva’s dividend payouts will be over the next few years.

City analysts currently expect payouts of 26.4p and 28.2p this year and next. At the current share price of 515p, that equates to yields of 5.1% and 5.5%. However, after today’s announcement, I’d expect these estimates to be upgraded in the coming weeks.

Disclosure: Edward Sheldon, CFA owns shares in Aviva. 

This article is provided for general information only and is not intended to be investment advice. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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