Monday, 6 February 2012

Portfolio Review: Aviva (LSE:AV.)

High-yield dividend shares form part of Level 6 of the DIY Income Investor Income Pyramid. As the fortunes of these companies change, so does their eligibility for my income-oriented portfolio. So it is worth reviewing the portfolio selection, at least annually.

So how is Aviva doing?

Aviva, according to their website, is the largest insurance group in the UK (and the sixth-largest in the world), employing over 36,000 people and insuring over 44 million customers worldwide.

2008 saw Aviva making a loss of £915 million, which coincided with the group reporting results for the first time on the now market-consistent 'embedded value basis' that all insurers must now use.

Citiwire Money's Smart Investor has recently reviewed Aviva's performance. The positive highlights are as follows:
  • market capitalisation of £10.5 billion, making it the 38th largest UK-listed company
  • exceptional dividend yield, currently at yield 7.1% - third highest in the FTSE 100
  • moderate payout ratio last year of 51.4% (providing some security for the dividend)
  • acceptable (but not outstanding for the FTSE100) return on equity (ROE): 12.4% last year and an average over the past five years of 9.5% (including the loss in 2008)
  • strong free cash flow:over the past five years free cash flow averaged £3.5 billion per annum versus average net profit over the same period of £1 billion per annum
  • £25 billion of cash and cash equivalents
  • price-to-book ratio of 0.78 (based on the current share price of 360p); if intangible assets are excluded, the price to book ratio remains attractive at 1.42
  • net asset value per share of 460p
  • current price to earnings ratio of 7.3 

However the main negative is the level of debt (at nearly £15 billion), giving a debt-to-equity ratio of 115%. Interest coverage is only rated 'acceptable' at 3.9 (taking into account interest on structural and operational borrowings). Aviva announced debt reduction of more than the £700 million early in 2011 but probably needs to do a lot more. 

Aviva's holdings are mainly financial assets, including much of the FTSE 100. However - as the Smart Investor argues, the FTSE 100 does not offer the value which Aviva does, whether that is measured on yield, free cash flow, price to earnings or price to book.

As a mainly financial business, Aviva remains vulnerable to a potential European financial meltdown; but otherwise at the moment it looks a great opportunity to lock in a great yield.

As I have a fairly large investment already, I will continue to HOLD.

Update (June 2012): Broker considers gloomy view of Aviva's Italian government bond holdings is overdone.

Update (July 2012): Is Aviva heading for a dividend cut?


I am not a financial advisor and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.

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