Picture supply: Getty Photographs
For income-seeking buyers, few issues pique curiosity greater than an enormous dividend yield. British insurance coverage large Aviva (LSE:AV.) definitely catches the attention with its trailing 7% dividend payout. However earlier than dashing in, it’s essential to analyse whether or not this excessive yield is constructed on stable foundations or might be a warning sign. Let’s take a better look.
The dividend
Aviva’s present annualised dividend of £0.33 per share equates to an interesting 7.01% dividend yield on the present share worth. This towers over the common yield of round 3%-4% for the broader FTSE 100 index.
Nevertheless, whereas the yield seems mouthwatering on the floor, one danger issue is that Aviva’s dividend is probably not effectively lined by the corporate’s money flows and earnings. The payout ratio sits at an elevated 89%, suggesting a large portion of income are being distributed to shareholders.
Usually, a payout ratio above 70%-80% may point out a dividend that’s changing into unsustainable if enterprise circumstances deteriorate. This makes the dividend riskier in comparison with insurers with decrease payout ratios and better revenue retention.
Promising indicators
That stated, there are some compelling the explanation why revenue buyers could wish to keep watch over the Aviva share worth as a possible shopping for alternative. Most notably, the inventory seems considerably undervalued primarily based on a reduced money movement (DCF) calculation.
The agency is presently buying and selling at a whopping 40% beneath the estimated honest worth calculation. This disconnect means the market could also be failing to correctly respect the insurer’s future earnings energy and money movement era capabilities following current restructuring initiatives and price cuts.
Moreover, Aviva turned worthwhile once more in 2023 after some difficult years. With forecast earnings development of 9% yearly, the corporate’s dividend affordability may enhance markedly.
The share worth has really seen some pretty sturdy motion within the final yr, up 18%, and simply outperforming the UK insurance coverage sector, which declined by 10% over the identical interval.
Dangers
Nevertheless, buyers should be conscious that the insurance coverage sector faces a number of headwinds that would derail the bullish funding case. The corporate operates in a really regulated business the place capital necessities, compliance prices, and litigation threats are at all times looming dangers.
There are additionally considerations round elevated claims from local weather change, pure disasters and the continued impression of upper inflation consuming into revenue margins. The UK’s financial outlook stays clouded by persistent cost-of-living pressures as effectively.
Solvency is one other metric insurance coverage buyers carefully monitor. However as of the newest report, Aviva held an estimated solvency ratio round 212%, offering a snug buffer over regulatory minimums though nonetheless decrease than some friends.
Total
All issues thought of, I really feel the agency presents a strong-but-higher-risk alternative for dividend buyers prepared to abdomen some volatility. The 7% yield is definitely eye-catching, however it’s backed by a excessive payout ratio that makes the Aviva share worth extraordinarily weak if earnings disappoint. I feel it deserves a spot on my watchlist, however I’ll not be investing for now.
