Image source: Getty Images
As we enter the final few months of 2024, dividend-hungry investors are naturally scrambling to find companies with good yields. Come in Aviva (LSE:AV.), the insurance titan that always turns heads with its 7% dividend yield. But this FTSE 100 Are you strong enough to watch those who want a salary for doing nothing? Let's dive in and see if the company is as strong as its 328-year legacy suggests.
Budget
First, let's address the elephant in the room: that cool 7% yield. In a world where most high street savings accounts still offer peanuts, the company's profits look like the real deal. But as any experienced investor knows, if something seems too good to be true, it often is. So, is Aviva's dividend a mirage or an oasis?
The good news is that the firm's finances look strong. The company returned to profitability in 2023 after some challenging years, and analysts are predicting 9% annual earnings growth. This ensures the sustainability of that impressive profit.
Not so important?
But for me, that's where it's most interesting. Shares currently trade at a steep 42% discount to estimated fair value, based on discounted cash flow (DCF) calculations. While such returns are far from guaranteed, the gap suggests that the market may be significantly underestimating future earnings prospects, especially considering the company's recent cost-cutting measures and restructuring plans.
Shares have shown some zip, rising 18% over the past year and best competition in the broader insurance sector, which has actually fallen by an average of 10% over the same period. This could be a sign that the big players in the market are starting to consider the company's strengths.
Accidents
Now, let's talk about the less attractive aspects of the business: that 89% payout ratio. Often, such a high percentage would set off alarm bells, as it leaves little room for maneuver if business conditions turn sour. However, the company's strong financial position (with a solvency ratio of 206%) provides a comforting buffer. The company's diverse business mix across life insurance, general insurance, and asset management also helps spread risk.
The insurance industry is facing many challenges from increased regulations, demands related to climate change, and the ongoing reduction in the cost of living. But I think management seems well-positioned to weather these storms, with strong branding, market-leading positions, and ongoing digital transformation efforts.
It ticks all my boxes
So, my Aviva 2024 income pick favorite? It certainly ticks a lot of boxes. While there are plenty of risks, I feel that the combination of higher yield, potentially lower share price, and improving business fundamentals make it an attractive proposition for cash-seeking investors willing to accept some short-term volatility. I will be adding shares next time.
Source link
