If you’re looking for a tale of how dividends can go wrong, look no further than Aviva (LSE: AV) (NYSE: AV.US).
During the crunch years from 2009, Aviva still managed to keep its dividend rising steadily — 24p in 2009, then 25.5p in 2010 and all the way to 26p by the following year. And with the share price dipping, the 2011 dividend yielded 8.6%!
The trouble was, earnings per share were falling, and in 2011 EPS only contributed 11.1p to the 26p paid out as cash. But some still thought the dividend would last, and in fact the first-half payment for 2012 was held at the same 10p as a year previously.
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Not sustainable
But for the full year, the company crashed to a loss, and in its results announcement told us that its priorities were “cashflow and debt reduction” — and the final dividend was slashed from 16p to 9p, taking the total payment down to 19p. Chief executive Mark Wilson said “The rebasing of the dividend […] is about giving certainty to shareholders, reducing debt, and putting Aviva in a sound position for the future“.
The folllowing year, 2013, saw Aviva’s dividend reduced further, to 15p per share for a yield of a much more modest 3.3% — but with earnings back on the up, it was at least covered 1.5 times.
What’s next?
So what does the future hold for dividends? Well, for 2013 the firm told us that cashflow was strengthening, especially in its trouble Irish and Italian operations, and that “all our turnaround businesses are now remitting cash to group“.
And by the time the first quarter of 2014 ended, we heard that “Aviva’s overall performance in the first quarter was reassuringly calm and stable“, and those are nice words to hear about the insurance business.
According to current forecasts, the dividend should be rising again this year, by 11% to around 16.6p. The share price has been climbing, standing at 519p as I write, and so the yield would be around 3.2% — marginally above the FTSE 100 average.
Looking safe again
But the key thing is that EPS should be rising strongly again, with the forecast 47p covering the expected dividend 2.8 times. And if the City folks have got it right, we could see the dividend up another 14% to 19p by 2015, to yield 3.7%.
It does look like the bad days are over for Aviva, and the rebasing of the dividend was probably the best thing the company could do. The annual cash handout now looks very solid, and we should hopefully be seeing sustainable rises over the next few years.
