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fan (LSE: AV.) Stocks have been gaining ground since October. But even after a 20% rise in just over three months, the price is still low enough to keep the expected dividend yield at 7%.
With such a large dividend, why don’t investors pile in and push the price even higher? I see a few reasons, but they seem short term to me.
One is that Aviva has posted a couple of years of declining profits. And forecasts for 2022 suggest a bit of profit reduction. Full-year results are due on March 9, and the focus this year appears to be on building long-term businesses.
refocus
It’s all part of restructuring and refocusing. Aviva had her fingers in so many pies around the world that many investors found it hard to see a united company. But the company has abandoned its international business and now focuses on its main insurance markets in the United Kingdom, Ireland and Canada.
I think that makes for a leaner business going forward, and I totally approve. But it also brings a whole new set of unknowns. The company will have to prove its new model to investors in the coming years.
It doesn’t help when those years begin with an economic crisis, rising energy costs, skyrocketing inflation, and rising interest rates. That’s really not the happiest set of circumstances for any company operating in the financial sector.
New business
In its third quarter update in November, Aviva reported a 46% increase in new business value, with improved margins. Business was looking positive across the board.
Executive Director Amanda Blanc said: “We are on track to meet our financial targets and business momentum is building. Our dividend guidance remains unchanged and, as previously announced, we anticipate beginning additional returns of capital to shareholders with our full-year 2022 results.“.
The size and shape of any new capital returns could give shares a lift, when the results are released. But I can’t help but think it might take a little longer for investors to fully accept Aviva’s revamped direction. And we may also need to see an easing of global economic difficulties.
Forecasts
Analysts seem to agree with the company’s guidance for now. Forecasts suggest a couple of years of earnings growth will follow, bringing the stock’s price-earnings ratio down to less than eight by 2024. In the same time frame, experts have a dividend yield growing at 8%
As always, investors should treat forecasts with caution. The brokers who make them tend to toe the line of the company. And they are often among the last to reflect any drop in investor sentiment.
There are certainly risks ahead. Primarily, I think, it’s the broader economics facing financial firms everywhere. And I don’t expect any quick gains in Aviva’s stock price. But I intend to keep topping up Aviva from time to time, to ensure a long-term dividend flow.
