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As we enter the final months of 2024, dividend-hungry investors are naturally on the hunt for companies with lucrative yields. Aviva (LSE:AV.), the insurance giant that always attracts attention with its mouthwatering 7% dividend yield. But is this really the case? FTSE 100 Index Which company should those looking for passive income pay attention to? Let's take a closer look at whether the company is as solid as its 328-year history suggests.
The dividend
First, let’s tackle the hot topic: that staggering 7% yield. In a world where many big-box savings accounts still offer a pittance, the company’s dividend looks like a veritable feast. But as any seasoned investor knows, if something seems too good to be true, it usually is. So is Aviva’s dividend a mirage or an oasis?
The good news is that the company's finances are looking increasingly solid. The company returned to profitability in 2023 after a few tough years, and analysts are forecasting earnings growth of 9% annually. This bodes well for the sustainability of that impressive dividend.
Underrated?
But for me, this is where it gets really interesting. The stock is currently trading at a whopping 42% discount to its estimated fair value, based on discounted cash flow (DCF) calculations. While those returns are far from guaranteed, this difference suggests that the market may be seriously underestimating future earnings potential, especially given the company's recent cost-cutting measures and restructuring initiatives.
The stock has already shown some momentum, rising 18% over the past year and comfortably outperforming the competition in the broader insurance sector, which has actually fallen an average of 10% over the same period. This could be a sign that the larger market players are starting to consider the company's potential.
Risks
Now, let’s address the less impressive elements of the business: that lofty payout ratio of 89%. Normally, such a high ratio would ring alarm bells, as it leaves little room for manoeuvre if business conditions worsen. However, the company’s strong capital position (with a solvency ratio of 206%) provides a comforting cushion. The company’s diversified business mix, spanning life insurance, general insurance and asset management, also helps spread risk.
The insurance industry is facing numerous challenges from increased regulation, climate change-related claims and the continued decline in the cost of living, but I believe management appears well positioned to weather these storms, with a strong brand, market leadership positions and ongoing digital transformation efforts.
It meets all my requirements
So, is Aviva my…? What is your favorite passive income option for 2024? It certainly ticks a lot of boxes. While there are many risks, I think the combination of a high yield, a potentially undervalued share price, and improving business fundamentals make it an attractive proposition for income-seeking investors willing to accept some short-term volatility. I will add stocks at the next opportunity.