One of many sights of shopping for shares in a confirmed FTSE 100 enterprise will be the revenue potential from dividends. Insurer Aviva (LSE: AV) is an instance. The Aviva dividend yield is at the moment 7%.
May it go greater from right here – and ought I to purchase this share for my ISA?
Uneven dividend historical past
At first look, the dividend story right here appears sturdy. Bizarre shareholder payouts have grown yearly for the previous few years. Final yr, for instance, the dividend elevated by 7%.
However as a long-term investor, I think about extra than simply the newest knowledge after I can. Trying again over the previous decade and extra, we will see that the dividend has been lower greater than as soon as.
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Dividends are by no means assured at any firm. The chart demonstrates what this has meant in observe. Aviva dividend development has been wholesome greater than as soon as earlier than, just for the payout to be lower at some later level.
Reshaped firm with sturdy prospects
Nonetheless, simply because that has occurred earlier than doesn’t essentially imply it is going to once more.
Over current years, Aviva has modified the form of its enterprise considerably. It bought a number of ops, distributing a few of the proceeds within the type of a particular dividend (not represented within the chart above).
That has allowed it to focus its vitality on key markets, such because the UK. It has a variety of aggressive benefits, together with a big buyer base, sturdy manufacturers together with Norwich Union and deep expertise in underwriting.
Thus far, nevertheless, the outcomes is probably not apparent from the corporate’s revenue efficiency. Primary earnings per share improved final yr however that adopted a run of declining efficiency.
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Earnings are an accounting measure, so don’t all the time present probably the most helpful information in terms of valuing monetary companies companies. They’ll transfer round loads as a result of modifications within the worth of belongings a agency holds on its books, one thing that will bear little relation to money flows.
In terms of Aviva’s dividend, money flows matter as a result of finally a dividend is a way for a corporation to distribute surplus money.
Right here once more, the corporate’s efficiency has moved round loads.
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What offers me confidence although, is that Aviva has demonstrated that it may generate vital extra money despite the fact that the quantity might transfer round from one yr to the following.
One measure of that’s what is called ‘Solvency II operating own funds generation’. Final yr that got here in at £1.7bn, 12% greater than the prior yr.
Future prospects look good
If Aviva can proceed to generate surplus money at a excessive degree — which I feel it seemingly can — then I anticipate the dividend to develop from right here. The corporate says it expects to develop the money value of the dividend, which if the share rely stays the identical means the per share payout ought to go up. The potential Aviva dividend yield can be greater than 7% in that case.
There are dangers alongside the way in which. Poor underwriting selections may unexpectedly damage earnings, as occurred at rival Direct Line final yr. Its elevated give attention to the UK market additionally ties Aviva extra intently to the UK economic system: a recession may make policyholders extra price-sensitive, hurting renewal charges.
However the revenue prospects appeal to me. If I had spare money to take a position, I’d be pleased to purchase Aviva shares.
