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Aviva - 2019 dividend cancelled

Nicholas Hyett, Equity Analyst | 8 April 2020 | A A A
Aviva - 2019 dividend cancelled

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Aviva plc Ordinary 25p

Sell: 402.60 | Buy: 402.80 | Change -1.50 (-0.37%)
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Aviva has announced that it will no longer pay its final dividend for 2019. This follows requests for dividend 'restraint' from UK and European regulators.

The decision not to a pay a final dividend means the group's capital ratio as of 13 March improves by 7 percentage points to 182%.

The group believes it's too early to quantify the impact of the coronavirus outbreak. However it's reviewing all material discretionary and project expenditure in the light of current disruption. It does not expect to make use of the government funded furlough scheme for UK employees.

The shares fell 8.1% in early trading.

View the latest Aviva share price and how to deal

Our view

Like all insurers Aviva has significant exposure to financial markets.

It invests the premiums from its annuity and general insurance contracts in government bonds and other assets to generate a return. Because investment returns are uncertain, regulators require the group to hold a certain amount of capital to guarantee it can meet any claims. When capital is above the level required by regulators the group can choose to pay it out as dividends.

However, in the current market - where investment returns are particularly uncertain, as are the level of insurance claims - regulators have suggested insurers should consider whether paying dividends is appropriate. Aviva has decided to err on the side of caution and cancel its dividend, and will not pay another one before the end of the year.

There are a few things here we think investors should note.

Firstly Aviva isn't in any kind of capital crisis, a 182% capital ratio would be perfectly healthy in normal times.

Secondly the decision to stop paying dividends doesn't, in principle, result in any financial loss to investors, although it's certainly a blow to those relying on the income. The cash is still there - it's just retained inside the business. Should it prove surplus to requirements it can be distributed to investors at a later date.

Nonetheless the final impact of the coronavirus crisis is far from clear. It could hit capital values, impact new business and increase claims - all of which would be bad news.

Longer term Aviva has been good, if steady, progress in recent times. At the full years the group had made good progress on cost control, with positive news on the revenue front too. Aviva Investors is attracted new assets, premiums were up in General Insurance - which had also sorted out last year's Canadian debacle - and inflows were rising in the Life and Savings business.

Digitisation is key to the company's cost cutting ambitions, and should increase cross-selling opportunities too. Meanwhile the ambitious debt reduction targets, if met, could reduce interest expenses and increase resilience too - particularly welcome given the increasingly tough economic environment.

However, if we have a gripe with Aviva it's that the path to profit growth beyond improved efficiency is unclear, and we're not sure this issue has been put to rest. Assuming the group weather's the current turbulence in good shape that's a problem that will still need fixing.

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Trading Update - 17/03/20

Ahead of an investor conference, Aviva said it estimates its Solvency coverage ratio is about 175%, after paying its final dividend. This is based on market values as of 13 March 2020. This estimate does not take into account any potential insurance losses arising from the ongoing COVID-19 outbreak.

The group has taken action to improve its liquidity position, and now has a centre cash position of £2.4bn, as at the end of February.

The group considers it too early to assess the final impact of the coronavirus outbreak on its business.

Full Year Results - 05/03/20

Full year operating profits rose 6% to £3.2bn, a record high. That primarily reflects lower losses in the corporate centre and on centrally held investments, with a weaker result in the UK.

The board announced a final dividend of 21.4p per share, taking the full year payment to 30.9p up 3% year-on-year.

The UK Life business saw operating profits fall 1.6% to £1.9bn. This reflects the inclusion of costs related to the UK digital business in the division, without which profits would have risen 1%. The division reported higher profits from annuities and equity release, as well as further benefits from changes in longevity assumptions. The division continues to attract inflows into its workplace pensions platform.

Aviva Investors operating profits fell 34.7% to £96m, reflecting lower assets under management (AUM) in the group's higher margin products. Overall AUM rose 4.7% to £346bn and 84% of funds beat their benchmarks over 12 months.

Operating profits from General Insurance fell 2.5% to £594m. The incorporation of UK digital costs impacted profitability, but the division benefitted from "significantly improved" profitability in Canada. Premiums increased across all three regions. The division aims to deliver an improved combined operating ratio (a core measure of underwriting ability) next year.

Europe Life operating profits rose 2.5% to £827m. The division saw new business volumes rise 9% to £13.8bn, with good growth in France and Poland. The division benefited from changes to longevity assumptions but continues to struggle with low yields.

Operating profits in the Asia Life business rose 4.9% to £276m. New business volumes grew 22%, with double digit growth in Singapore and China.

Total cash paid by the divisions to Aviva group fell 16.1% to £2.6bn. The group's Solvency II ratio, a key measure of insurers' capital, rose slightly to 206%.

Return on equity during the year rose to 14.3% (2018: 12.5%).

Find out more about Aviva shares including how to invest

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.