It’s been a very mixed year across the FTSE 100 in 2014, but one of my favourites, Aviva (LSE: AV) (NYSE: AV.US) has put in a terrific performance. At 533p, the shares are up 30% over 12 months against a 3% rise for the index — and since the start of 2014, we’re looking at a 19% rise while the FTSE hasn’t even managed 1%.
Impressive recovery
That success comes after tough spell, and the share price has actually failed to match the FTSE over five years, showing a 26% gain against 35%. The price dropped to around 250p in mid-2012 when it became clear that the insurance firm’s overstretched dividends were going to break. The second half payout was slashed that year, leading to a full-year dividend of 15p per share for 2013, down from 26p in 2011.
But the dividends were not being covered by earnings, and it was naive to expect yields of 8.5% to be sustainable.
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Aviva already looks set to resume annual dividend rises, with a 10% boost to 16.4p forecast for the year ending December 2014 — based on earnings per share (EPS) expected to more than double. At today’s price, that would yield a modest 3.1%, which is around about the FTSE average — but it would be covered 2.8 times by earnings, and we already have a rise to 3.6% pencilled in for 2015.
How has Aviva managed its turnaround?
Smelling the coffee
Emerging from the recession that hit the financial services sector has helped, and by December 2013 Aviva’s cash remittances were up 40% to £1.27bn.
A key part of turning that into profit was a focus on cost savings and the divestment of low margin, underperforming, and non-strategic operations. At the time, chief executive Mark Wilson gave us his upbeat but understandably cautious take on things, saying “Have we made progress? Yes, some. Is it a little faster than anticipated? Probably. Have we unlocked the full potential at Aviva? Not yet“.
The final dividend was raised 4.4% from the second half of 2012, even though the full-year total was lower.
Six months further on, Mr Wilson said that “The half year results show that momentum in Aviva’s turnaround continues. All of our key metrics have improved, operating earnings per share are up 16%, and book value has increased 7%“. And again some conservative words: “Aviva remains a work in progress, and these results are a step in the right direction“.
The result is that Aviva is a leaner and fitter company today. And it’s not overpriced — even after this year’s climb, the shares are still on a forward P/E of only 11, dropping to 10 based for 2105. At the end of 2011, Aviva shares had been trading for 27 times earnings!
Long-term prospects
Now that Aviva’s approach to cash is more rational, I’d be surprised if the shares don’t outperform the FTSE next year, too. In fact, I see Aviva as a great long-term bet now — just as long as the next bull market doesn’t lead to exuberance running ahead of sensible finances again.
