How Aviva Will Deliver Its Dividend

LONDON -- I'm looking at some of your favorite FTSE 100 companies and examining how each will deliver their dividends.

Today, I'm putting insurance group Aviva  (LSE: AV  ) (NYSE: AV  ) under the microscope.

Dividend history: Cut #1
Aviva has cut its annual dividend no fewer than three times since the turn of the millennium.

When the company released its annual results for 2001, the board held the dividend at the previous year's 38 pence, but announced that it intended to "rebase" ("cut" in plain English) the 2002 dividend by 39% to 23 pence.

Management said the rebasing was to a level from which the company could pursue "a progressive policy of growing dividends." The target was annual growth of approximately 5% with dividend cover in a range of 1.5 to 2.0 times operating earnings after tax.

For the five years to 2007, Aviva delivered dividend growth of: 5%, 5%, 7.5%, 10%, and 10%. For 2008, the dividend was held at the previous year's level of 33 pence.

Dividend history: Cut #2
Aviva rebased the dividend again during 2009: the half-year dividend was lopped by 31% to 9 pence and the final dividend by 25% to 15 pence.

The board described its aim as: "To position the dividend at a sustainable level from which it can grow."

The board said its dividend policy "remains unchanged," and that the rebased 2009 dividend of 24 pence was 1.8 times covered by operating earnings after tax -- "which is within our 1.5 to 2.0 times dividend cover target range."

Dividend history: Cut #3
It wasn't long before Aviva cut the dividend yet again. With the arrival of a new chief executive, the board slashed the final dividend for 2012 by 44% and said it expects a reduction of the same percentage for the next half-year payout.

Management said that going forward: "Aviva will have a progressive dividend policy, with reference to growth in cashflows and earnings."

Going forward
In contrast to the past, Aviva's new dividend policy is vague in the extreme. While it aims to be"progressive," there is no explanation at all of how the dividend will be determined in relation to cash flows and earnings beyond "with reference to."

In effect, whatever the board decides to do with the dividend in future could be claimed to be in line with the dividend policy. It seems to me that a comment of Warren Buffett's on fund managers is equally applicable here:

I believe that those entrusted with handling the funds of others should establish performance goals at the onset of their stewardship. Lacking such standards, managements are tempted to shoot the arrow of performance and then paint the bull's-eye around wherever it lands.

Summing up
At a current share price of 330 pence, Aviva is on a yield of 4.4% based on a 14.6 pence payout derived from the company's last final dividend and guidance on the next interim.

While the yield isn't bad, Aviva's appalling dividend record, the vagueness of its current dividend policy, and the cyclical nature of the insurance business don't suggest to me that this company is the most handsome of dividend shares for the future.

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