Aviva shares plunge on rising FTSE after dividend cut

Aviva (AV.L) shares dropped by 13%, sharply bucking wider gains on the FTSE 100, after the insurance company realised investors' worst fears and slashed its dividend 44% as part of its ongoing attempts to reshape its balance sheet.

The move came in sharp contrast to news from smaller competitor Standard Life (SL.L), which announced a special dividend payout of 12.8p per share after reporting a 65% rise in profits.

It also contrasted with wider market optimism ahead of European Central Bank and Bank of England policy decisions.

‘The rebasing of the dividend and the elimination of the dilutive scrip is about giving certainty to shareholders, reducing debt, and putting Aviva in a sound position for the future. This is the right course of action,’ said Aviva chief executive Mark Wilson.

The final 2012 dividend falls to just 9p per share, down from 16p. Aviva’s full-year dividend of 19p per share is down from 26p in 2011.

The dividend cut – which follows similar action from RSA last month – came alongside a loss of £3.1 billion for 2012, which Wilson said was largely due to the sale of Aviva’s US business, for £1.1 billion, around half what it paid for it six years earlier.

‘2012 was a year of transition at Aviva,’ he said. ‘The £3 billion loss after tax is driven principally by writedowns we have previously announced due to the agreed sale of our US business.’

The company also announced a pay freeze for its top 400 managers as it continues plans announced in July 2012 to cut costs by £400 million by the end of 2013 and exit non-core markets or underperforming areas of the business.

While some traders were questioning whether the sharp share price fall to 314p was overdone, Eamonn Flanagan of Shore Capital was unequivocal as he downgraded the shares from ‘hold’ to ‘sell’: ‘We stress that the market should not underestimate the scale of the task facing the brand new management team... the long, hard slog begins now!’

Despite Aviva’s drag on the index, London shares moved higher, with the FTSE 100 up 0.2% to 6,442, resuming its upwards trajectory after finishing narrowly down yesterday. Aggreko (AGGK.L), the temporary power firm, led the blue chip index, up 10% to 1,932p after announcing pre-tax profits of £365 million.

Other European markets showed similar gains, with the German Dax up 0.16% and French Cac 0.4% higher. The euro rose sharply, up nearly 0.5% to $1.3027.

Investors are looking ahead to the BoE and ECB meeting results. While on balance, according to polls by Reuters, economists do not expect changes to interest rates from either central bank, they could provide signs of more stimulus to come.

The Bank of Japan, in its last meeting before Governor Haruhiko Kuroda takes over, refrained from extending its own stimulus programme overnight, as expected.

‘The change at the top of the central bank is likely to make monetary policy fundamentally more expansionary,’ commented Commerzbank analysts.

See our FTSE data pages for the day's other risers and fallers.