One of many sights of shopping for shares in a confirmed FTSE 100 enterprise could be the earnings potential from dividends. Insurer Aviva (LSE: AV) is an instance. The Aviva dividend yield is presently 7%.
Might it go larger from right here – and ought I to purchase this share for my ISA?
Uneven dividend historical past
At first look, the dividend story right here appears sturdy. Odd shareholder payouts have grown yearly for the previous few years. Final yr, for instance, the dividend elevated by 7%.
However as a long-term investor, I take into account extra than simply the latest knowledge once I can. Wanting again over the previous decade and extra, we are able to see that the dividend has been reduce greater than as soon as.
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Dividends are by no means assured at any firm. The chart demonstrates what this has meant in apply. Aviva dividend development has been wholesome greater than as soon as earlier than, just for the payout to be reduce at some later level.
Reshaped firm with sturdy prospects
Nonetheless, simply because that has occurred earlier than doesn’t essentially imply it’ll once more.
Over latest years, Aviva has modified the form of its enterprise considerably. It offered a number of ops, distributing a number of the proceeds within the type of a particular dividend (not represented within the chart above).
That has allowed it to focus its vitality on key markets, such because the UK. It has various aggressive benefits, together with a big buyer base, sturdy manufacturers together with Norwich Union and deep expertise in underwriting.
Thus far, nonetheless, the outcomes might not be apparent from the corporate’s revenue efficiency. Primary earnings per share improved final yr however that adopted a run of declining efficiency.
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Earnings are an accounting measure, so don’t all the time present essentially the most helpful data with regards to valuing monetary providers companies. They will transfer round rather a lot attributable to adjustments within the worth of belongings a agency holds on its books, one thing which will bear little relation to money flows.
On the subject of Aviva’s dividend, money flows matter as a result of finally a dividend is a way for a corporation to distribute surplus money.
Right here once more, the corporate’s efficiency has moved round rather a lot.
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What offers me confidence although, is that Aviva has demonstrated that it might generate vital extra money although the quantity might transfer round from one yr to the following.
One measure of that’s what is named ‘Solvency II operating own funds generation’. Final yr that got here in at £1.7bn, 12% larger than the prior yr.
Future prospects look good
If Aviva can proceed to generate surplus money at a excessive stage — which I believe it probably can — then I count on the dividend to develop from right here. The corporate says it expects to develop the money price of the dividend, which if the share depend stays the identical means the per share payout ought to go up. The possible Aviva dividend yield could be larger than 7% in that case.
There are dangers alongside the best way. Poor underwriting decisions might unexpectedly damage income, as occurred at rival Direct Line final yr. Its elevated give attention to the UK market additionally ties Aviva extra intently to the UK financial system: a recession might make policyholders extra price-sensitive, hurting renewal charges.
However the earnings prospects entice me. If I had spare money to take a position, I might be completely satisfied to purchase Aviva shares.
