Aviva rides out inflationary pressures and hikes dividend

While Legal & General (LGEN) received a market kicking for not announcing new capital giveaways in its interim figures, it would have been logical if the lack of obvious shareholder goodies in half-year results for general and life insurer Aviva (AV.) had triggered a similar reaction. However, luckily for Aviva investors, the company showed an ability to offset the worst of the hikes in inflation with a combination of rising rates and new business wins. This, alongside a prediction for a total dividend payout this year of £915mn, or approximately 33p a share, was enough to keep the bears at bay.

Key to Aviva’s performance was how it managed costs alongside the inflationary pressures in its general business lines. This was a particular success for the company and baseline controllable costs absorbed 7 per cent inflation to stay essentially flat at £1.34bn, which will help Aviva to achieve its £750mn cost savings target earlier than expected this year.

However, it was the performance of its general insurance arm in the UK & Ireland, plus Canada, that helped to underpin the results. A combination of rate rises and new business meant the operating profit for this segment leapt by 29 per cent to £470mn, offsetting a disappointing decline in its wealth and retirement arm of 13 per cent to £436mn, although this reflected investment in the business rather than the state of the market – which was largely buoyant due to how interest rate rises have improved the returns for annuities. That was reflected in a better combined operating ratio of 94.8 per cent.

Unlike L&G’s giant asset management arm, Aviva Investors is a marginal part of the business, largely handling investment on behalf of other Aviva divisions, which is why its 50 per cent fall in profits had no material impact on the results.

Management forecast that full-year operating profit would grow by 5-7 per cent on the £1.35bn achieved in 2022. The company’s capital policy remains unchanged, with business reinvestment, bolt-on acquisitions and capital returns to shareholders taking precedence. These are expected to be funded by its capital generation now that the unprecedented special payouts funded by business disposals are at an end.

Consensus values the shares at a forward price/earnings ratio of 8.6 for 2023, more in line with Aviva’s long-term average. The inflation-beating dividend yield is a clear attraction. Buy.

Last IC view: Buy, 462p, 9 Mar 2023