A Closer Look at Aviva's Dividend Potential

LONDON -- Dividend income accounts for around two-thirds of total returns, the actual rate of return taking into account both capital and income appreciation. Given that share prices are often volatile and unpredictable, the potential for plump dividends can give shareholders much-needed peace of mind for decent returns.

I am currently looking at the dividend prospects of Aviva  (LSE: AV  ) (NYSE: AV  )  and assessing whether the company is an appetizing pick for income investors.

How does Aviva's dividend history stack up?

  2009 2010 2011 2012
FY Dividend Per Share 24p 25.5p 26p 19p
DPS Growth -27.3% 6.3% 2% -26.9%
Dividend Cover 1.6x 2x 0.2x n/a

Source: Aviva Company Accounts.

Aviva has been an unreliable dividend deliverer in recent years and has slashed investor payouts three times since the turn of the millennium. Sizeable losses per share in 2009 and 2012 forced the firm to cut the full-year dividend by more than a quarter in these years.

Aviva raised the dividend in 2011 despite a heavy earnings fall, although this subsequently pushed dividend cover well below the safety benchmark of 2 times forward earnings and provided a precursor to last year's full-year cut, prompted by a 44% reduction in the final dividend as it aims to reduce leverage and increase retained earnings.

What are Aviva's dividends expected to do?

  2013 2014
FY Dividend Per Share 14.7p 15.4p
DPS Growth -22.6% 4.8%
Dividend Yield 4.4% 4.6%

Source: Investec.

Broker Investec expects earnings to come under sustained pressure in the near term, driving the dividend lower once again this year before a gradual earnings recovery in 2014 pushes the dividend modestly higher again. Aviva announced earlier this year that the 2013 interim dividend will also be subject to a 44% cut.

Aviva announced in last week's interims that the value of new business advanced 18% in the first quarter to 191 million pounds, while it also managed to slash operating costs by an impressive 10%. New business in the core U.K. market rose 33% from the corresponding 2012 period, although the news was not all rosy -- new business in Spain and Italy collapsed 67% and 56% respectively, for example.

How does Aviva's dividend prospects rate against the competition?

  Prospective Dividend Yield Prospective P/E Ratio
Life Insurance 4.6% 14.2
FTSE 100 3.1% 16

Source: Digital Look.

Aviva was recently changing hands on a P/E readout of 8 for 2013, far below those of the FTSE 100 and its life insurance peers. However, in my opinion, the firm's ultra-low rating is fully justified given continued earnings uncertainty and subsequently prospects of fresh pressure on shareholder payments.

The company's turnaround story is likely to take some time to bed in as severe restructuring takes hold, keeping earnings per share under pressure and consequently shareholder payouts.

Last week's results showed that the life insurance giant's recovery plan is making good progress, which bodes well for decent earnings growth over the long term. But I would like to see new business inflows continue to punch solid momentum, as well as further evidence of substantial cost reduction, before taking the plunge.

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