Does 30% Dividend Increase Make Aviva plc A Better Buy Than Admiral Group plc?

Which firm is best positioned to deliver reliable dividend growth, Aviva plc (LON:AV) or Admiral Group plc (LON:ADM)?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Aviva (LSE: AV) (NYSE: AV.US) shares rose by nearly 5% on Thursday morning, after the firm revealed a solid set of 2014 results.

Shareholders were cheered by a 30% increase in the final dividend, taking the total payout for 2014 to 18.1p per share, a 20% rise on the 2013 payout of 15p.

However, 18.1p is a lot less than the 33p paid by Aviva in 2008, or the 26p paid in 2011. Aviva has a terrible record of dividend cuts — can we now trust the firm’s progressive payout policy, or should we look elsewhere?

On possible alternative is Admiral Group (LSE: ADM), the motor insurance firm that has developed a reputation for very generous payouts.

Admiral also issued its 2014 results on Thursday, in which the firm announced a full-year dividend of 98.4p per share, which gives a whopping 6.6% yield — double the 3.3% on offer at Aviva.

Which firm is the better buy for income investors?

Contrasting results

Car insurance premiums have been falling in the UK, and the motor insurance sector went through a soft patch last year: Admiral’s pre-tax profits fell by 4% and turnover fell by 3%, despite a 10% rise in customers.  

In contrast, Aviva’s recovery in the hands of chief executive Mark Wilson appears to be gaining momentum. Mr Wilson has been focused on reshaping the group to deliver strong cash flow and growth, and appears to be succeeding.

In 2014, the value of new business to Aviva rose by 15% to a record £1,009m, while Aviva’s excess cash flow — a measure of free cash flow generated by Aviva’s operating businesses — rose by 65% to £692m. That’s equivalent to 23p per share, and fully covers the 18.1p dividend payout.

Foolish final thought

Admiral’s chunky 6.6% headline yield is attractive, but the group’s dividend policy is for the total payout to reflect after-tax profits — and these are expected to fall by around 10% in 2015.

In my view, Admiral shares may now drift lower: trading on almost 16 times 2015 forecast profits and with a dividend cut likely this year, there’s no reason to expect them to go higher.

In contrast, I believe Aviva is a far more appealing buy today: the shares trade on a 2015 forecast P/E of 11 and offer a rising dividend payout underpinned by ongoing earnings growth.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head owns shares in Aviva. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Google office headquarters
Investing Articles

1 reason I like buying S&P 500 shares – and 1 reason I don’t

Will this investor try to improve his potential returns by focusing more on S&P 500 shares instead of British ones?…

Read more »

Young woman holding up three fingers
Investing Articles

3 SIPP mistakes to avoid

Our writer explains a trio of potentially costly errors he tries to avoid making when investing his SIPP, on an…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

Here’s how (and why) I’d start buying shares with £25 a week

Our writer uses his investment experience and current approach to explain how he would start buying shares on a limited…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Here’s my 5-step approach to earning passive income of £500 a month

Christopher Ruane explains the handful of steps he uses to target hundreds of pounds in passive income each month.

Read more »

Investing Articles

2 UK shares I’ve been buying this week

From a value perspective, UK shares look attractive. But two in particular have been attracting Stephen Wright’s attention over the…

Read more »

Investing Articles

A lifelong second income for just £10 a week? Here’s how!

With a simple, structured approach to buying blue-chip dividend shares at attractive prices, our writer's building a second income for…

Read more »

Investing Articles

Here’s how I’d use a £20k Stocks and Shares ISA to help build generational wealth

Discover how our writer would aim to turn a £20k Stocks and Shares ISA into a sizeable nest egg by…

Read more »