High-yielding Aviva plans big capital return

As is customary these days, Aviva's results document runs to a whopping 148 pages. Fortunately for time-poor investors, chief executive Mark Wilson was on hand to cut to the chase with a succinct nine word summary.

"More operating profit, more capital, more cash, more dividend," was the New Zealander's verdict on what he said were "simple and clear cut" results. Furthermore, he added, there is more to come.

Shareholders in the insurer were in no hurry to argue with this emphatic opening line from Wilson's results presentation. Aviva shares continued their recent recovery from last summer's Brexit-induced slump, rising by 6% to 544p after Wilson said he was also "actively planning" a return of additional capital to shareholders, one year ahead of schedule.

He added: "Aviva's financial position has been transformed and a distinctly stronger balance sheet and excess capital give Aviva more options."

Wilson joined Aviva as chief executive at the start of 2013 and has focused on rebuilding its financial strength. In 2015, he led the £6 billion acquisition of Friends Life Group, which was the largest deal in UK insurance for 15 years.

Today's improvement in operating profit of 12% to £3 billion reflected good performances across the business. The life and pensions division beat City expectations with profit growth of 8% to £2.64 billion.

As well as synergies from the Friends Life deal, profits benefited from growth in protection, pensions and individual annuities. This more than offset lower bulk annuity sales.

In general insurance, Aviva delivered an operating profit of £833 million, up 9% and ahead of the consensus of £756 million. Figures for this division excluded the impact of the recent change in the Ogden discount rate, which has been classified as an exceptional item.

Aviva is taking a £380 million after-tax charge for Ogden, which is the formula for calculating lump-sum compensation payments for personal injuries. Without this, the combined operating ratio was in line with expectations at 95.2%.

The strong operating performance is mirrored in the company's capital position, with a surplus of £11.3 billion and Solvency II coverage ratio of 189%, which is above the company's targeted range of 150-180%.

Panmure Gordon analyst Barrie Cornes said this 9% gap equated to about £1 billion, some or all of which Aviva will now look to return to shareholders.

He believes the shares continue to look undervalued, prompting an increase in his target price from 525p to 592p in order to reflect the capital return and good recent trading performance.

Aviva shares are currently trading on price/earnings (PE) multiples of 9.6 and 9.1 respectively for 2017 and 2018, with prospective dividend yields of 5.2% and 5.5%.

Today's full-year dividend of 23.3p a share was in line with expectations after a 12% rise.

Cornes added: "We have been slightly concerned that Aviva has been trying to position itself amongst investors purely as an income stock but we understand from discussions with the company that this is not the case."

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