Aviva (LSE: AV) shares currently offer a forecast dividend yield of more than 7%. I’m wondering if this FTSE 100 insurer is an unloved bargain I could buy to lock in a big income for life.
Health warning
I’ll start by saying that it’s important to remember that dividends are never guaranteed and can always be cut. Aviva’s own record is far from perfect.
Since 2000, this FTSE 100 firm has cut its dividend four times – in 2002, 2009, 2012 and 2020. Admittedly, both 2009 and 2020 coincided with global crises. But even then, some rivals managed to preserve their payouts.
However, I think Aviva is a changed business these days. Since chief executive Amanda Blanc took charge in July 2020, she has stayed true to her promise of moving “at pace”. Today’s slimmed-down business looks stronger and healthier to me than the company she inherited.
I think there are good reasons to believe that the group’s current dividend could deliver sustainable growth for the foreseeable future.
A return to growth
One big challenge for Blanc is to find a way to return Aviva to growth. While the group’s insurance and retirement brands are very strong in the UK, they operate in pretty mature markets. Winning new customers usually means taking them from a competitor, which isn’t easy.
The good news is that Aviva seems to be cracking this problem. Sales in each of the group’s main businesses rose during the first quarter of this year:
- Annuity and equity release sales rose by 22% to £1.3bn
- Life insurance was up 2%, at £8.4bn
- General insurance (e.g., motor, home) was 5% higher, at £2.1bn
Looking ahead, Aviva’s guidance is for a dividend of 31p per share in 2022 (7.1% yield), rising to 32.5p in 2023 (7.5% yield).
From 2024 onwards, the company expects to increase the dividend by a few percent each year. That should be ideal for keeping up with inflation, assuming price growth returns to more normal levels.
Aviva’s dividend guidance is backed by its projections for cash generation. On balance, I think these numbers look pretty safe at the moment.
Aviva shares: why I’d buy
I think that Aviva shares offer most of what I’m looking for as an income investor. First of all, the group’s cash generation looks strong to me. My sums suggest it should comfortably support the dividend. That’s crucial.
The second reason I might buy is that I think the shares look cheap. Aviva currently trades on eight times 2022 forecast earnings, falling to just 6.8 times 2023 earnings. The stock’s 7%+ dividend yield is another indicator of potential value, in my view.
One final reason for me to buy is that I think Aviva should benefit from rising interest rates. Broker forecasts seem to support this view. They show profits rising faster than revenue from 2023 onwards.
In my view, the potential rewards from buying Aviva shares comfortably outweigh the risk of another dividend cut. I’d be very happy to add this FTSE 100 dividend stock to my portfolio today.
