Covid-19 blights progress at Aviva, but balance sheet stays strong

Insurer has good news on dividends as it refocuses on its heartlands of the UK, Ireland and Canada.

Aviva (LSE:AV.) has delivered a generally upbeat statement and outlook in its first-half results, with the added highlight of positive dividend news.

A new policy includes a payment of 7p with a proposed final dividend of 14p. For the future, the size of the payout is set at sustainable levels, although dividend growth may not be at historically high rates. 

Even so, the news puts the implied yield in excess of 6%, which is a breath of fresh air to income-starved investors who have seen the requirement for yield largely evaporate as the pandemic has bitten. 

The implied yield may not return Aviva to the previously heady heights of around 9%, but the new framework is nonetheless welcome and likely to prove resilient in tougher times.

In terms of the trading performance, the group is edging towards a sharper focus on its business within the UK, Ireland and Canada. 

• The Week Ahead: Aviva, Compass, AO World
• Aviva brings back dividend, though Covid hits profits
• Income investors lose £1.5bn, but FTSE stars deliver

This could come at the expense of the operations in Continental Europe and Asia, given the desire to simplify the portfolio. These operations will be managed for long-term value. However, in the event of the units failing the strategic objectives, Aviva is likely to withdraw. 

The recent divestments in Singapore and Italy have shown that the company aims to remain committed to its word, while the 21% decline of new business premiums in the combined regions could be an ominous sign.

Nearer to home, the performance in the year to date has been strong, with new business sales in the UK & Ireland up by 40% and where the Savings & Retirement unit has seen inflows representing an increase of 20%. 

Controllable costs have also reduced by 5%, and an additional bonus has come in the form of Covid-19 claims within general insurance. Lower claims in the third quarter reduced the overall previous value of claims from £165 million at the end of the first half to a current level of £100 million. 

• Dividends are back after a year of disappointment
• Take control of your retirement planning with our award-winning, low-cost Self-Invested Personal Pension (SIPP)

At the same time, the balance sheet remains robust, with a solvency ratio of 195% and a capital surplus of £11.8 billion providing a reassuring base from which to work, given the company’s growth and dividend aspirations.

As with many stocks within the financial sector, any progress has been blighted by the pandemic. Despite a jump of 55% since the March low, the shares remain down by 22% in the year to date. 

Over the last 12 months the performance is similar, with a decline of 19% comparing to a drop of 14% for the wider FTSE 100. 

However, if Aviva is moving towards a more focused and simplified future, underpinned by strong capital stability, the market consensus of the shares as a ‘buy’ is likely to remain intact.