Aviva brings back dividend, though Covid hits profits

Insurance giant’s profits dip 11.6%, but still above expectations. A further boost is a 6p dividend for 2019, with further payouts possible this year. 

Worries about the prized Aviva (LSE:AV.) dividend were set aside today as investors welcomed clarity from new boss Amanda Blanc on the future direction of the insurance giant.

The main takeaway from Blanc's first results presentation concerned a pledge to focus on growing Aviva's market-leading positions in the UK, Ireland and Canada. Operations in Europe and Asia will be managed for long-term shareholder value, with Aviva not afraid to jettison them if they do not meet strategic objectives.

Blanc, who started in the top job last month, said financial strength and debt reduction were among her key priorities:

“It is clear we need to create greater financial flexibility to either invest in our businesses or to return capital to our shareholders.”

That focus on shareholder returns was welcomed in the City, particularly as Blanc also announced a review of the longer-term dividend policy. Aviva's 9% yield had been one of the best in the FTSE 100 index until Covid-19 put the proposed 2019 payment on ice.

Resilient trading during the pandemic means Aviva is now in a position to make an interim payment of 6p a share in respect of 2019, equivalent to 28% of the original total. Any awards linked to the 2020 performance, as well as the future of the rest of the deferred 2019 dividend, are due to be considered by the board later this year.

• Dividends are back after a year of disappointment
• ii view: Aviva dividend blow
• Five most-held dividend stocks among the biggest income funds

The dividend resumption was one of the factors driving shares as much as 7% higher. Investors were also impressed by a half-year operating profit of £1.2 billion that came in 11% stronger than expectations but down 11.6% on the same period of last year due to Covid-19 claims. A Solvency II ratio of 194% was also better than the 189% forecast.

The City will no doubt be relieved that Blanc is not spending time on another lengthy strategic review or capital markets day. She said:

“Our investors and our customers - and our people - expect action, progress and improvement. And we are going to give it to them.”

This will include a focus on improved operational delivery, which Blanc believes has held back the business from making more of its dominant market position and brand strength.

Blanc, who started her career as a graduate at one of Aviva's ancestor companies, Commercial Union, before holding senior roles at Axa and Zurich Insurance, says:

“We must transform our performance and improve our efficiency. This requires great customer service, stronger innovation and better use of our brand.”

• ii view: Direct Line paying two dividends
• ii view: Aviva dividend blow
• Take control of your retirement planning with our award-winning, low-cost Self-Invested Personal Pension (SIPP)

The dividend review comes just over a year after former boss Maurice Tulloch ripped up the old policy under which investors had feasted on several years of double-digit percentage increases. Instead, he wanted to see dividends grow more in line with earnings per share.

Those plans are now back under consideration as part of a renewed focus on achieving a sustainable pay-out and managing debt. A future reduction in the dividend may already be factored into City valuations, which is another reason why shares still rose today.

However, UBS added: “The dividend policy review suggests a dividend rebasing which we find disappointing in the context of strong financials (solvency, liquidity, cash generation).”

The Swiss bank has a price target of 375p, which compares with just over 300p seen at the peak of trading this morning. The shares had plunged as low as 211p in March, from over 400p earlier in the year.

Blanc said the company's response to the pandemic had been “spot on”, with more than £40 million given to charities and communities and the company achieving its own “robust” financial performance with a 12% fall in half-year operating profits. This was driven by a better-than-expected result in UK life insurance, with general insurance also beating City hopes.