High-yielding Aviva keeps dividend promise

After Direct Line axed its dividend, income investors breathed a sigh of relief today following an update from fellow insurer Aviva.

Dividend promises made by Aviva (LSE:AV.) just under a year ago remained in place today as the insurer reassured on its trading performance in the face of weather and inflation pressures.

The update by Aviva’s general insurance arm eased the market’s jitters after high-yielding Direct Line Insurance Group (LSE:DLG) scrapped its dividend due to claims incurred in December’s cold snap.

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Aviva’s costs during the pre-Christmas freeze are about £50 million but it told investors that its weather experience across 2022 has been broadly in line with long-term averages.

Its profitability guidance given in November for a group combined operating ratio of about 94.6% still stands and the outlook for dividends and capital returns is also unchanged.

In March, chief executive Amanda Blanc announced “clear guidance” on dividends for the next two financial years. This included the payment of £870 million from 2022 trading, equivalent to about 31.5p a share and representing an increase of about 40% on 2021.

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An interim dividend of 10.3p was paid on 28 September, with the final dividend due in shareholder accounts on 17 May based on annual results on 9 March.

This award is expected to be followed by growth of 5% in 2023 to around 33p a share and worth about £915 million, with low-to-mid single digit growth in the years after that.

Blanc said in March that Aviva’s dividend plan represented an attractive payout level from long-term, sustainable cash and capital, with any surplus available for investment in the business or return to shareholders over time.

Aviva’s shares led the FTSE 100 index risers' board today, meaning the stock has recovered almost all the ground lost in the wake of Direct Line’s shock warning on 11 January.

The Churchill insurer blamed the decision on a near doubling in weather claims over initial expectations, alongside a further increase in motor claims inflation and lower value of investments in commercial property.

It had one of the highest dividend yields on the London market at around 10%, having set aside £199 million to pay last year’s final award of 15.1p a share. The shares, which started the year at 221p, fell 3.45p to 172.45p today after analysts at Berenberg removed their “buy” recommendation with a new target price of 160p.

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Aviva’s UK general insurance arm, which contributed 21% of operating profit in 2021, has 12% of UK’s £6 billion home insurance market and 8% of the £13 billion motor insurance sector. As well as strong levels of cash generation, it provides capital diversification and important cross-selling opportunities.

In a presentation to City investors today, Aviva highlighted its ambition to grow profits from personal lines insurance from the £100 million a year seen in 2019-21 to £150 million in 2022-24 and to above £200 million by 2027.

Despite today’s reassuring statement, Aviva shares remain more than 100p short of where they stood in the weeks after Blanc’s dividend plan last March.

The share price weakness has been seen across the sector as property and casualty insurers deal with inflation pressures, weaker house prices dampen protection sales, and cost-of-living strains weigh on savings and asset management flows.

Big dividend yields have been a key attraction for the insurance sector over many years, but the recent increases in bond yields have meant competition for capital has increased.

Bank of America said recently that 2022 had been a dreadful year for UK insurance and warned that this year is likely to be challenging. On property and casualty lines, it expects insurers will close the gap between pricing and claims inflation but that the recovery in earnings could be pushed into 2024.

The bank holds a “neutral” recommendation on Aviva shares, preferring Prudential (LSE:PRU) and Beazley (LSE:BEZ)as its top picks in the UK insurance sector.