ii view: FTSE 100 dividend star Aviva keeps cutting costs

A diversified mix of life and general insurance offering a dividend yield of over 6.5%. We assess prospects. 

Third-quarter trading update to 30 September

Chief executive Amanda Blanc said:

"Trading is positive and our performance is consistently strong. We have had a good nine months due to our market leading positions, our customer focus and the clear benefits of Aviva's diversified business across insurance, wealth and retirement.”

ii round-up:

Insurer Aviva (LSE:AV.) today detailed a broadly reassuring trading update, if reflective of the more challenging conditions battled in the third quarter.

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A 1% decline in overall UK and Irish life sales were countered by a 10% rise in general insurance gross written premiums, underlining Aviva’s diverse business model.

Management highlighted that it does not have an offering in the Liability Driven Investment (LDI) market, recently in the news following the Truss government’s mini-budget, other than for Aviva's own staff pension schemes. 

Aviva shares drifted around 1.5% lower in UK trading having come into this latest announcement up around 6% year-to-date. Shares for rival Legal & General Group (LSE:LGEN) are down around a fifth during 2022, while Asia-focused Prudential (LSE:PRU) is down nearer a third. 

Aviva’s push for better efficiency continues, with controllable costs down 2% year-on-year, while its capital position, or strength remained comfortably above management’s targeted range.

Its purchase of financial advice provider Succession Wealth completed in August, should aid prospects, while guidance regarding the dividend and the planned commencement of a new share buyback programme is left unchanged. 

Broker UBS reiterated its ‘buy’ stance on the shares following the announcement, flagging an estimated fair value target of 490p per share.

Full-year results are scheduled for 9 March. 

ii view:

Tracing its history back to 1696, Aviva today provides savings, retirement pension products and insurance to around 18 million customers. Goals to become a simpler, more competitive, and more commercial company have headed its recent agenda. Overseas businesses lacking the relevant scale have been sold, with a focus on the UK, Ireland, and Canada being made.  

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For investors, life companies’ exposure to increased UK bond market volatility since the mini-budget has increased caution around the sector. Geographical diversity at Aviva has also reduced over recent years following business sales, while profits from general insurance like motoring are battling the headwind of rising claims inflation.

On the upside, Aviva is now a more focused business. Costs are being tackled, strong capital generation is fuelling shareholder returns, including a planned share buyback scheme come the new financial year, while management point to a robust balance sheet. It also says motor claims cost inflation is starting to slow.

On balance, and with the tailwind of increasing group efficiency and a historic and estimated future dividend yield of over 6.5%, income investors at least are likely to remain patient. 

Positives: 

• Cutting costs
• Attractive dividend yield (not guaranteed)

Negatives:

• Loss of geographical diversity
• General insurance is subject to events outside of management’s control

The average rating of stock market analysts:

Buy