Should you buy the Aviva share price for its massive 12% shareholder yield?

Aviva plc (LON: AV) supports one of the best shareholder yields in the FTSE 100 (INDEXFTSE: UKX), but is that a reason to invest?

| 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) shares currently support a shareholder yield of 12%. This is one of the highest returns in the FTSE 100, and it looks as if it is only set to grow in the years ahead. Below I’m going to take a look at whether or not this income champion deserves a place in your portfolio.

Rewarding shareholders

Earlier this year, Aviva’s management to set out its plans to reward shareholders following years of business restructuring. After cutting costs and exiting non-core markets, it is now better positioned than it has ever been to grow and reward investors. 

As part of the strategy, the firm announced that it is planning £2bn of excess capital (capital that isn’t needed in the business) throughout 2018 and 2019. Just under £1bn will be used for debt reduction. £500m has been earmarked for bolt-on acquisitions, and a total of £600m is going to be spent buying back stock. 

The company hasn’t hesitated in deploying this £2bn windfall for investors. First-half results, issued earlier today, informed investors that the business has already started its buyback programme and has paid back €500m of expensive debt. 

Unfortunately, the release also revealed a 2% decline in operating profit. Management has blamed business disposals for the fall in profit and expects the group to return to growth during the second half of the year. Overall, the group believes it is on track to grow profits by 5% for the full year. Operating EPS came in at 26.8p, beating City forecasts of 25.1p. 

What really attracts me to this business is its dividend outlook. Today’s release revealed a 10% increase in the interim dividend to 9.3p, putting the company on track to achieve its fourth year of double-digit dividend growth in a row. Analysts are expecting a similar level of growth for the final distribution as well. Current numbers suggest an increase of 9.7% for Aviva’s full-year payout to investors, giving a total distribution for the year of 30.1p, which is equivalent to a dividend yield of 6.1%. But as noted above, this isn’t the only capital the company is returning to shareholders. 

Double-digit yield 

Shareholder yield captures the three ways of returning company cash to investors: debt paydown, share buybacks, and dividends. All of these are inherently capital returns because they all increase shareholder value, albeit in different ways. Paying down debt, for example, transfers wealth from creditors to shareholders. Buybacks reduce the number of shares outstanding, increasing the value of each share that remains. 

Including the £900m of debt paydown, £600m share buyback and 30.1p full-year dividend, I estimate Aviva’s total shareholder yield will top 12% for 2018.

Turning to valuation, Aviva looks to me to be undervalued. Based on current City estimates for growth, the stock is trading at a forward P/E ratio 8.5, a discount of nearly 30% to the rest of the insurance industry. With the company expecting mid-single-digit earnings growth for the foreseeable future, I see no reason why it deserves such a deep discount the rest of the industry. I believe this is a desirable price to pay for a high-quality insurance business with a 12% shareholder yield.

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.

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Businesswoman calculating finances in an office
Investing Articles

Up 32% in 12 months, where do the experts think the Lloyds share price will go next?

How can we put a value on the Lloyds share price? I say listen to all opinions, and use them…

Read more »

Investing Articles

2 FTSE 100 stocks hedge funds have been buying

A number of investors have been seeing opportunities in FTSE 100 shares recently. And Stephen Wright thinks two in particular…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

Would it be pure madness to pile into the S&P 500?

The S&P 500 is currently in the midst of a skyrocketing bull market, but valuations are stretched. Is there danger…

Read more »

Investing Articles

If I’d put £20k into the FTSE 250 1 year ago, here’s what I’d have today!

The FTSE 250 has outperformed the bigger FTSE 100 over the last year. Roland Head highlights a mid-cap share to…

Read more »

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Growth Shares

The Scottish Mortgage share price is smashing the FTSE 100 again

Year to date, the Scottish Mortgage share price has risen far more than the Footsie has. Edward Sheldon expects this…

Read more »

Investing Articles

As H1 results lift the Land Securities share price, should I buy?

An improving full-year outlook could give the Land Securities share price a boost. But economic pressures on REITs are still…

Read more »

Young Caucasian man making doubtful face at camera
Investing Articles

How much are Rolls-Royce shares really worth as we approach 2025?

After starting the year at 300p, Rolls-Royce shares have climbed to 540p. But are they really worth that much? Edward…

Read more »

Investing Articles

Despite rocketing 33% this hidden FTSE 100 gem is still dirt cheap with a P/E under 5!

Harvey Jones has been tracking this under -the-radar FTSE 100 growth stock for some time. He thinks it looks a…

Read more »