The case for investing in Aviva is simple; can it maintain its dividend?
Is Aviva’s dividend sustainable?
Sometimes an argument comes down to a very simple equation. At time of writing the Aviva shares are trading at 402p and dividend yield is 7.46 per cent. UK inflation is currently 1.5 per cent.
That means that if you were to buy shares in the company right now, your yield net of inflation would be six per cent. On average, since inception, the FTSE 100 has provided a return, net of inflation, including growth in share prices and dividends, of around five per cent. So that makes Aviva seem attractive.
But whether this really is a good deal depends on two things: what you think will happen to the dividends long-term and what you think will happen to inflation. In the unlikely event inflation rises to 7.46 per cent, Aviva’s real dividend would be zero.
There are reasons to think UK inflation will rise. For one thing, Tory outright victory in the election is looking likely, meaning the odds of a hard-ish Brexit increase, meaning the pound is likely to weaken, medium-term.
Both the Tories and Labour have got extravagant plans regarding fiscal stimulus, which should bear down on the pound even further, long-term.
Then again, inflation is not likely to rise that much.
Maybe, of more relevance, is the impact of Brexit on Aviva long-term.
Although the company has international diversification and recently, apparently, changed its mind to sell its Singapore business, Aviva is focused on the UK economy. So, to an extent, a bet on Aviva is a bet on the UK economy.
The share price is down by more than a third over the last five years. I don’t think enough emphasis is put on looking at long-term movements in the share price. Maybe, investors need to ask what reasons there are to think the next five years will be better for the company than the last?
Actually, there are some reasons for positivity. For one thing, Aviva dealt itself a self-inflicted wound with a fiasco over preference shares. For another, its new (newish) boss, Maurice Tulloch, has been impressing many.
- He has a plan for a “stronger, simpler, better Aviva.” Then again, the plan he actually revealed was pretty complex.
- He maintains that Aviva has strong growth potential.
- The current dividend cover is okay — dividends were 30p a share, earnings per share 38.2p in its latest full year.
Such a high yield is difficult to resist, especially if you see growth potential too.
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees