UK Edition
Questor: Aviva's simplified business make it a worthwhile investment
Few FTSE 100 insurance chiefs make headlines in the Rotorua Review but then few blue-chip bosses have to journey all the way back to small town New Zealand to visit their old schoolyard.
On a recent trip to his homeland to pick up a distinguished alumni award from the University of Waikato in Hamilton, Aviva’s Mark Wilson shared the idea that what Maori culture taught the world about land sustainability was directly relevant to businesses too.
In four years at the helm, Wilson has set about making the insurance giant solid and sustainable.
Aviva has become a cash machine, helped in part by the 2015 acquisition of Friends Life that initially stumped the City but has boosted its UK life and pensions activities. The shares have always been bought for income even when the company was in far worse shape. Wilson is pressing ahead with plans to make those returns better for investors.
This year’s target is to increase the dividend payout to 50pc of operating earnings. Alongside annual figures in March, it crept up four basis points to 46pc.
The question is how Aviva continues to deliver once deal synergies have been wrung out and while weighted towards low-growth markets such as the UK.
Wilson has been saying all the right things lately. Instead of showering new customers with deep introductory discounts, he is pledging to reward those that remain loyal. He offered some much-needed Brexit realism. Now he is threatening to make acquisitions in the buzzy areas of artificial intelligence and big data.
The technology drive is not a flash in the pan. It is ploughing £100m a year into digital innovations such as a smartphone app that collates customer policies in a neater way than reams of paper. Integrating its systems will enable the group to do better at cross-selling products but also managing risk.
Aviva continues to be simplified; a relief for investors who remember that diversity has been a drag on stock market performance. Last month Wilson announced the sale of its half-share in two Spanish life and pensions joint ventures plus a retail life business for a total consideration of £403m. It was a price Barrie Cornes at Panmure Gordon described as solid rather than spectacular but shows the management is maintaining its discipline over where capital should be deployed. There is more to come.
A story did the rounds in March that Aviva was looking to offload Friends Provident International, the Isle of Man-based life and investments unit. It could raise more than £500m and Chinese buyers are said to be keen.
Its shares price movement since the Brexit vote says more about investor confidence in the company than it does about the broader UK economy. Since June 23 last year, when Aviva stock took an immediate tumble, it has been marked 19pc higher, with most stock pickers agreeing it has further to go. That view was reinforced in March with a 12pc lift in annual operating profit to £3bn.
Aviva’s Solvency II ratio was up to 189pc, demonstrating its capital strength, helped by £3.5bn of cash generated. The hit from changes in the so-called Ogden rule, which is used to calculate the amount paid to victims suffering life changing injuries, barely dampened the enthusiasm.
Since then, the company has announced a £300m share buyback. Analysts at UBS calculate surplus capital deployment of up to £5bn by the end of 2020, with 4pc annual growth in earnings per share.
Wilson has acknowledged that selective acquisitions and reinvestment will be part of the mix as he aims to boost earnings. Digital routes to market will help in the longer term and there are opportunities in corporate pensions.
I suspect the City campaign to liberate Aviva from its asset management arm is not over. Aviva Investors is delivering more profit. Its flagship multi-strategy funds might have trebled to £9bn under management but is still a rounding error within total assets of £345bn. If sustainability is the name of the game, the division must do more to justify its place.
The Prudential might offer better growth prospects because of its strong Asian franchise, but with a secure 5pc dividend yield Aviva is a welcome inclusion in any portfolio. The shares are a Strong Hold.