There can be something pleasing about owning a stake in a large, successful company that also has a juicy dividend. Take FTSE 100 insurer Aviva (LSE: AV) as an example. Despite the Aviva dividend being cut several years ago, the shares still yield 7.3%.
How secure is the dividend – and could it go higher from here?
Dividend rises on the cards
No dividend is ever guaranteed and a quick look at the Aviva dividend history makes this clear. It has been cut before in recent years – and it could be cut again.
On the other hand though, it may also increase.
Last year saw the annual dividend hit 33.4p per share. That represented a healthy increase of 7.7% from the prior year. That’s a significant boost, well ahead of that seen at many FTSE 100 companies.
The insurer also upgraded its dividend guidance for this year to “mid-single digit cash cost growth”. Insurers rarely keep things simple! What that language means is that the cost to the company in cash of funding the dividend is likely to rise by something in the region of 5%, give or take.
That does not necessarily mean that the per share dividend will go up by that amount. That depends on how many shares are in circulation at the time. But I doubt Aviva will issue many, if any. In recent years it has been reducing its share count. So I expect an increase in the dividend.
Is the payout sustainable?
A dividend is a reflection of underlying business health. For the Aviva dividend to be maintained, let alone increased in the future, the business needs to generate enough cash to support it.
There are risks for the company. Its sale of foreign businesses in recent years means the company is now heavily concentrated on the UK.
That could be good or bad for Aviva depending on the performance of the UK insurance market. Strong competition may hurt profit margins in the industry, for example. Claims inflation could do the same – just look at the torrid couple of years experienced by shareholders in rival Direct Line.
But I think the sharper UK focus helps the business concentrate where it is best positioned to do well. I see that as positive for its business prospects.
Last year, operating profit grew 9% — ahead of the dividend – to £1.5bn. Aviva’s business remains highly cash generative. Including the proceeds of business sales, it has spent £9bn in the past three years on dividends and share buybacks.
I expect demand for insurance to be fairly resilient even in a weak economy. Aviva has strong brands, long underwriting experience and a solid balance sheet.
With a market capitalisation of under £13bn, it trades on a price-to-earnings ratio of 12. I see that as good value and I am also optimistic of future increases in the Aviva dividend.
If I had spare cash in my ISA today, I would be happy to buy this share.
