One of many points of interest of shopping for shares in a confirmed FTSE 100 enterprise might be the revenue potential from dividends. Insurer Aviva (LSE: AV) is an instance. The Aviva dividend yield is presently 7%.
May it go larger 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 to be like robust. Odd 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 take into account extra than simply the latest knowledge once I can. Trying again over the previous decade and extra, we are able to see that the dividend has been reduce 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 follow. Aviva dividend progress has been wholesome greater than as soon as earlier than, just for the payout to be reduce at some later level.
Reshaped firm with robust prospects
Nonetheless, simply because that has occurred earlier than doesn’t essentially imply it is going to once more.
Over latest years, Aviva has modified the form of its enterprise considerably. It bought a number of ops, distributing among the proceeds within the type of a particular dividend (not represented within the chart above).
That has allowed it to focus its power on key markets, such because the UK. It has plenty of aggressive benefits, together with a big buyer base, robust manufacturers together with Norwich Union and deep expertise in underwriting.
Thus far, nonetheless, the outcomes will not be 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 essentially the most helpful data in relation to valuing monetary companies corporations. They will transfer round lots attributable to adjustments within the worth of belongings a agency holds on its books, one thing which will bear little relation to money flows.
In the case of Aviva’s dividend, money flows matter as a result of finally a dividend is a way for an organization to distribute surplus money.
Right here once more, the corporate’s efficiency has moved round lots.
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What offers me confidence although, is that Aviva has demonstrated that it might probably generate vital extra money despite the fact that the quantity could transfer round from one yr to the following.
One measure of that’s what is named ‘Solvency II working personal funds era’. Final yr that got here in at £1.7bn, 12% larger than the prior yr.
Future prospects look good
If Aviva can proceed to generate surplus money at a excessive stage — which I feel it probably can — then I anticipate the dividend to develop from right here. The corporate says it expects to develop the money price of the dividend, which if the share depend stays the identical means the per share payout ought to go up. The possible Aviva dividend yield could be larger than 7% in that case.
There are dangers alongside the way in which. Poor underwriting decisions may unexpectedly harm income, as occurred at rival Direct Line final yr. Its elevated give attention to the UK market additionally ties Aviva extra carefully to the UK financial 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 speculate, I might be completely happy to purchase Aviva shares.
