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Investors get their cake: Aviva holds dividend as profits tumble
High-yielding insurer Aviva maintains its dividend despite swinging to a first-half loss and saying it needs to raise more capital.
Aviva is hanging on to its dividend, much to the relief of shareholders, after the insurer swung to a surprise half-year loss and revealed how much more capital it needs to save.
The company, which lost its chief executive to a shareholder rebellion in the spring, reported a net loss after tax of £681 million for the first six months of the year, down from a first-half profit after tax of £465 million.
The main factor was a massive writedown of £876 million of goodwill in its US business, which looks like a prelude to the operation being sold at a loss for around £1 billion.
Executive chairman John McFarlane (pictured), who took the helm after Andrew Moss was ousted, announced last month he would seek to sell or close a quarter of the group’s underperforming businesses. The US business is said to be high up the disposal list.
Operating profits fell 10% to £935 million, short of the £1 billion analysts had expected, and down from £1.035 billion last time. The eurozone crisis has hit the group hard as this is where it does most of its business. Sales fell in many countries, and the value of this reduced business was undermined by the weak euro.
Aviva also spent £186 million on restructuring, including £72 million on implementing Solvency II, a new set of regulations designed to ensure insurers are financially robust at all times.
This is a sore point for Aviva. Financial strength has been its Achilles' heel during the sovereign debt crisis. Fears about its capital position have seen the shares (AV.L) halve in the past five years.
Today it announced a new target for financial strength, saying it would seek to increase capital surpluses so that they stood at between 160% and 175% of the minimum capital it is required to hold by regulators. Surpluses stand at £4.7 billion, providing coverage of 142%, implying that it needs to raise around another £1 billion.
Fortunately, this shortfall will be met largely from disposals, with investment banks appointed to advise on the sale of 10 of the 16 business units on McFarlane's chopping block.
The dividend looks safe for now with the interim payment held at 10p per share, meaning shareholders can continue to enjoy the 8.2% yield.
Barrie Cornes, analyst at Panmure, reiterated his ‘buy’ rating saying Aviva was ‘compelling’ value and ‘highly attractive on all metrics’. Although Aviva’s net asset value per share fell to 395p from 435p as a result of the US writedown, the shares, down 1.3% to 313p, are still trading at a big discount.
Marcus Barnard and Hari Sivakumaran of Oriel Securities are unimpressed with the retrenchment, however. In a note to clients the analysts said: ‘While we understand the Solvency II benefits that Aviva may gain from selling the US, the net result of turning a £2 billion acquisition into £1 billion disposal proceeds (or similar) is hardly great work. Nor is exiting the largest savings market in the world. In our opinion, new management have been brought into to turn this business round, not simply sell it at a loss and blame it on previous management.’
It’s a good point, but with the shares up 30% in the past month and the high dividend yield intact Aviva investors can for once celebrate having their cake and eating it at the same time.
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by Gavin Lumsden on Dec 10, 2013 at 16:51