Trying on the annual shareholder payout from insurer Aviva (LSE: AV), I like what I see. In the meanwhile the Aviva dividend yield is 7%.
I believe it might go increased from right here. So, ought to I make investments?
Promising dividend outlook
Let me begin by explaining why I’m upbeat about what may occur to the payout. In spite of everything, it’s just some years since we noticed an Aviva dividend reduce (a reminder that no payout is ever assured to final).
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There are a few methods one may take a look at this so far as I’m involved.
One is to say that insurance coverage is a cyclical enterprise – charges go up and underwriters do nicely, then in some unspecified time in the future they fall once more throughout the business and income shrink.
One other evaluation is that Aviva has traditionally been a ragbag of various companies, however beneath present administration has grow to be extra focussed and has now put its dividend on a extra sustainable footing than was the case.
Which of those is extra true (as each could also be legitimate), solely time will inform. However I believe there’s a lot to love in regards to the enterprise outlook for the insurer, from its massive buyer base, robust place within the UK market, and model to its confirmed underwriting capabilities.
The dividend grew by 7.7% final 12 months. The yield is already 7%. So if the dividend development fee can proceed at its present stage, the possible yield a few years from now might be 8% and inside 5 years, the FTSE 100 share might be yielding a juicy 9%.
Balancing dangers and rewards
Present administration of the corporate strikes me as competent and reasonable. So, for the Aviva dividend to continue to grow at a robust clip, the enterprise efficiency might want to assist it.
Typically when trying on the sustainability of a dividend, I take a look at a agency’s free money circulate.
Can that assist right here, although? Take a look at the chart.
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Like lots of monetary providers corporations (particularly insurers), free money circulate doesn’t assist me as a lot because it might. It displays monies coming out and in that don’t essentially illustrate the underlying well being of the corporate.
So I pay extra consideration to how a lot surplus capital Aviva generates, as it could actually use that to assist fund its dividend.
Right here, I believe issues look promising. In its full-year outcomes for final 12 months, the corporate introduced a share buyback. It additionally introduced the money price of its dividend is about to continue to grow by mid-single digits annually. That may very well be, for instance, 5% — however because the buyback reduces the variety of shares, that might imply a better per share development within the payout.
If I had spare money to speculate, the potential of a rising Aviva dividend would make me wish to add this earnings share to my portfolio.
