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Dividend fears hit Aviva but banks power FTSE higher
Markets are cheered by the start of the US corporate reporting season but Sainsburys is downgraded after its trading statement.
Aviva’s share price come back was interrupted today as a warning over the company's dividend overshadowed the announcement of its sale of its remaining stake in Delta Lloyd, dragging the reforming insurance company to the bottom of a rising FTSE 100.
Despite some share price losses from UK blue chips including Aviva (AV.L) and Sainsbury (SBRY.L), the FTSE 100 (up 15 points or 0.25% to 6,068) and other European indices (France and Germany up 0.2%) were all higher, buoyed by optimism at the start of the US corporate earnings reporting season. Aluminium producer Alcoa started the proceedings last night with better-than-expected fourth quarter sales of $5.9 billion.
British bank shares were rallying. Lloyds (LLOY.L) led the pack higher, up 3.6% to 52.7p, after UBS upgraded the group to buy from neutral. ‘We think Lloyds will deliver rising margins, falling costs and falling provisions, which will provide a very strong upswing to profitability and EPS momentum over the next few years,’ commented UBS analyst John-Paul Crutchley.
RBS (RBS.L) and Barclays (BARC.L), which had their target prices raised by UBS, followed Lloyds higher with gains of around 2% to 344p and 293p respectively. 'We are raising our price targets for the UK domestic banks to reflect the better growth and profitability picture beginning to emerge, combined with lower dilution risks as the regulatory agenda fades,' Crutchley added.
Investors now look ahead to data on European economic growth today and the meetings of the European Central Bank and Bank of England tomorrow.
Aviva continues to restructure
Aviva announced last night that it had sold its remaining 19.4% stake in Delta Lloyd, at a 1.6% discount to the Dutch insurance group’s closing price. The sale is the latest move by Aviva in a strategy to sell or close a quarter of the group’s underperforming businesses.
Analysts welcomed more progress in Aviva’s efforts to restructure. Kevin Ryan of Investec said the disposal had a limited balance sheet impact, but provided ‘further evidence of the determination to restructure’.
A string of analysts have raised their expectations for Aviva shares in recent weeks, praising the company’s progress in restructuring its business, first under executive chairman John McFarlane and now under new chief executive Mark Wilson
'The question is now, what next?’ Eamonn Flanagan, an analyst at Shore Capital, commented. ‘To a major extent, the 'low hanging fruit' has been picked with management now left with the much more mundane and laborious task of delivering real operating value from its UK and Continental European focused businesses.’
Investors though were preoccupied by a warning from Barclays analysts that Aviva may cut its 2013 dividend by 15%, as asset sales would create 'earnings and balance sheet strain'. Shares dropped by 2.8% to 371p.
Barrie Cornes of Panmure Gordon though countered in a separate research note that a cut to the 2013 dividend was unlikely, 'given the relatively small saving that would be made in doing so even if a 40% cut were made in 2013'.
Supermarket group Sainsbury was also among the biggest losers on the FTSE 100 this morning, dropping 3.5% to 327p after reporting a small rise in sales over the festive period. While noting Sainsbury’s results were ‘respectable’, Seymour Pierce trimmed back their profit forecasts and downgraded the shares from ‘hold’ to ‘reduce’. ‘We suspect Sainsbury will struggle to outperform in 2013 as Tesco continues its fight back and there is some margin vulnerability as momentum slows,’ said analyst Kate Calvert.
Phil Dorrell, director of retail consultants, Retail Remedy, said: ‘Taking into account overall market conditions and the fact that Tesco was like a man possessed during the festive period, these numbers are reasonable.’
On the UK’s mid-cap index Centamin (CEY.L) shares shot up by 10% to 48p after the gold producer reported a record quarter at its Sukari mine in Egypt. Rob Broke and Nick Hatch, analysts at Westhouse, said: 'These results have shown the strength of Centamin’s operations at Sukari, despite ongoing negative external influences. We maintain our Buy recommendation and 65p target price.'
See our FTSE data page for the day's other risers and fallers
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In this guide to investment trusts, produced in association with Aberdeen Asset Management, we spoke to many of the leading experts in the field to find out more.
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Look up the shares
- Aviva PLC (AV.L)
- Royal Bank of Scotland Group PLC (RBS.L)
- Barclays PLC (BARC.L)
- Lloyds Banking Group PLC (LLOY.L)
- J Sainsbury PLC (SBRY.L)
- Centamin PLC (CEY.L)
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