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Aviva - dividend up 15%

Charlie Huggins | 10 March 2016 | A A A
Aviva - dividend up 15%

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Aviva plc Ordinary 25p

Sell: 427.70 | Buy: 427.80 | Change -3.30 (-0.77%)
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Aviva has announced a 20% rise in full year operating profit to £2,665 million. The contribution from Friends Life (£554m) and underlying growth (£103m) more than offset headwinds from foreign exchange movements (£117m) and a reduction in one-off items. Operating earnings per share (EPS) rose 2% to 49.2p after allowing for the dilutive impact of the FL share issuance; while the total dividend rises by 15% to 20.8p. The shares rose by more than 2% in early morning trading.

Highlights

Life insurance operating profits increased 20% to £2,419m, principally driven by the Friends Life contribution. The value of new business (VNB) was 24% higher (+14% excluding FL), the twelfth consecutive quarter of growth, with Europe VNB up 14% in constant currency and Asia VNB up 22%.

In general insurance and health, operating profits fell 5% to £765m. This reflected an £81m decline in investment income, partially offset by £33m growth in underwriting profit. The Group combined operating ratio (COR) improved to 94.6% (FY14: 95.7%); with UK and Ireland broadly flat; and Europe and Canada showing a 2.3 percentage point improvement.

Aviva Investors delivered fund management operating profits of £105m in 2015, up 33%.

The integration of Friends Life is ahead of schedule, with £168m of run-rate savings achieved to date, and a further £57m targeted by the end of 2016 (total: £225m), one year earlier than the original plan. The integration is expected to give rise to £1.2 billion of capital benefits, £400m of which were achieved in 2015.

Increasing the level of cash remittances from business units remains a key focus, to fund the dividend and growth initiatives. In 2015, total remittances were £1,507m (FY14: £1,431m). The group has a progressive dividend policy with a target pay-out ratio of c. 50% of operating EPS (FY15: 42.3%).

The digital strategy is progressing well. The group saw 27m visits to its UK website in 2015, up 35%.

Balance sheet

Aviva's Solvency II model application was approved in December. It starts 2016 with a Solvency II cover ratio of 180% and plans to raise this by an additional 5 to 10 percentage points in 2016, subject to economic conditions. The group says its balance sheet is one of the strongest and most resilient in the UK market, with "low sensitivity to market stress".

Outlook

The group will maintain its focus on expenses and business mix improvement, reallocate capital towards businesses with superior returns and continue to prioritise investment in digital. Mark Wilson, CEO, commented: "We enter 2016 from a position of strength. Our focus remains on transforming our business and delivering on our commitments."

Our view

Under Mark Wilson, Aviva is being transformed into a leaner, more coherent business, with a focus on cash generation and financial strength. Shareholders are being compensated for the pain suffered in the past by a rapid rebuilding of the dividend. The stock trades on 9.3x prospective earnings and the prospective yield is 4.9%, rising to 6.9% by FY18, on current analyst forecasts.

For too long Aviva was the insurer that never really got its mojo going, having a structure that derived more from a series of acquisitions than any sort of organic growth history. Mark Wilson's background might suggest an imminent Asian expansion drive, given his time at AIG's Asian unit, but the evidence so far is that he is first determined to fix the businesses closer to home. That makes sense; a strongly performing European composite insurer with good cash generation can one day fund a lot of growth further afield, if that is where the Board decide to go in years to come.

For now, shareholders can feel the benefit of having a simpler group, with fewer, but larger operating units and product strategies that meld with consumers' increasing desire to transact financial services digitally. The incremental £600m cash flow that Friends Life brings the group takes the pressure off the balance sheet and ought to make light work of servicing the internal debt of £2.8bn, owed by the Life companies to the General Insurance arm.

If we had a complaint about Aviva, it is that the brand still, we suspect, means nothing to anybody, and that a company that runs motor insurance adverts on TV with the strap-line "7.2, that'll do" probably doesn't have much of a performance culture. But a lot is changing under Mark Wilson, so we will set our prejudices aside and hope to enjoy reading Aviva's future financial results rather more than we do watching their commercials.

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