Aviva moves to plan ‘B’

The pressure was always going to be on management at Aviva (AV.) to come up with a sure-footed way of rewarding shareholders after a raft of disposals completed during the year left the company with a significant cash bounty. With activist investor Cevian Capital glowering in the corner, Aviva’s management had to grab control of the agenda with some eye-catching initiatives, and they did not disappoint.

Cevian had demanded a £5bn return of capital to shareholders prior to these results. In what looks like a compromise solution on the part of chief executive Amanda Blanc, Aviva will now combine a total capital return of £4.75bn, with a hefty hike in the dividend this year, in a bid to satisfy the market. The announced £3.75bn in capital return, along with its existing £1bn programme brings Aviva close to the magic £5bn number.

The distribution will be via a ‘B’ share scheme where shareholders will receive one ‘B’ share for every ordinary share, which will then be redeemed at £1 each. Furthermore, the company also plans to consolidate its shares and it will explain how this will work in a forthcoming circular. The other component of the buyback was a major hike in the dividend planned for this year. Blanc forecast that the dividend would rise to 31.5p a share this year, and 33p a share in 2023, representing a more than 40 per cent increase on this year’s payment.  

While Aviva has been all about downsizing in recent years, it did unveil an acquisition in these results with the purchase of Succession Wealth for £385m, which will fit in with Aviva’s wealth management division. Aviva sees the wealth management sector in the UK as a key driver of growth in the coming years as rising numbers of retirees take up their pension entitlements. The acquisition was funded from generated capital and will have an impact on the solvency II, bringing this down to a pro-forma 186 per cent, but it will add around £24m immediately in cash profits.

You cannot fault the ambition from Aviva, which is targeting an annual capital generation figure of £1.5bn from its solvency II position. Activist pressure may have played a role in how the company has designed its payout programmes, but this was the first set of results in some time that showed a fresh start for Aviva after years of underachievement. With the prospective dividend yield topping 7 per cent at current levels, the company is doing its best to become an income-seekers' favourite. Buy.

Last IC View: Buy, 420p, 12 Aug 2021