Aviva Share Discussion Threads

[linton5] 04/12/2020 08:52

Just read the company news flow it's all there about dividends

[adelwire2] 04/12/2020 08:40

Thanks. Apologies for asking do we know when next 7p after that is due?

[unastubbs] 04/12/2020 08:04

ex-div this thurs, paid in jan

[adelwire2] 04/12/2020 08:01

Is that correct 7p dividend this Thursday?

[wba1] 03/12/2020 20:35

cyberian; no chance of change. You only have to look at the treatment of Andrew Tyrie, who was possibly the best backbencher of my lifetime, to understand that cabinets and key appointments are about cronyism and yes men. And that is true of all parties.

[whatsup32] 03/12/2020 19:48

X div next Thursday 7p

[spcecks] 03/12/2020 16:11

Thanks Spud good article.

[cyberian] 03/12/2020 16:10

Agree with an earlier post that suggests that HMG and to an extent the BoE are not singing from the same hymn sheet over dividend and Solvency 11 issues. Likewise the Johnson Cabinet are making a pig's ear over the vaccine boasts, and this could go sadly wrong. Heaven help us if no deal over Brexit....Johnson is not up to the job in my opinion and the Education and Business Secretary need to be fired, along with a few others. I despair sometimes. There is better talent on the backbenches than the current cabinet, and some should be appointed to replace the lost causes! Anyway, AV. is looking as though it has established a firmer base with the SP, and in anticipation of more progress on a number of fronts within the next few months.

[ianood] 03/12/2020 14:53

Spud, Thanks, makes me feel happier!

[eurofox] 03/12/2020 14:29

good article spud, thanx for posting

[yump] 03/12/2020 14:11

Yes thanks for that I’ve got a load in sipp. Perhaps its conglomerate discount + poor management

[jomac2412] 03/12/2020 13:43

Thanks for posting Spud , a good summary .

[muscletrade] 03/12/2020 13:15

Thanks for posting that Spud. Decent appreciation of the position especially as it reaffirms what many on here already agree on.
Would have liked to see a little more granularity on quantum of undervaluation but we have a pretty good handle on that anyway.

He refers to "conglomerate discount" a number of times. I would have thought previous "poor management" discount a better description.

[spud] 03/12/2020 12:03

Aviva plc: Backing A CEO Who Is Backing Herself



Summary
Aviva's valuation shows a large conglomerate discount which is set to be unwound and also new clarity over the dividend policy has recently been given which is a positive.

The business has shown resilient earnings and operating performance over the course of a challenging 2020.

The new CEO has backed herself to turn around the company with a £1 million share purchase soon after joining the company, which shows insider confidence in the true outlook.

For some reason British newspapers love to write about FTSE 100 life insurance company Aviva plc (OTCPK:AIVAF). Perhaps it's because it has 33 million customers, or perhaps it's because, in every of the last five years, its stock has underperformed the UK benchmark, the FTSE All-Share by quite a lot, so it's easier for commentators to be critical of it.

This year, at the time of writing, its stock has lagged the market by nearly 10 percentage points. Recent commentaries however have largely been in praise of new boss Amanda Blanc, one with an analogy to boxing, another with coverage of the recent new dividend policy. However, it was the Financial Times' Lex column which most sparked my interest in the stock quoting "Aviva offers deep value and income, but with little assurance for growth." The article also showed a chart from RBC Capital Markets noting Aviva's more than 45% "conglomerate discount" being the second largest from eight large-listed insurance companies.

The Global Investor thinks that with the dividend being reinstated, the cheap valuation and crucially the new CEO's large share purchase, this stock is a worthwhile candidate for any value-oriented portfolio. Lex notes that the stock doesn't offer much growth opportunity, and that may be right, but it doesn't mean good money can't be made in this stock.

A turnaround strategy refocusing the business on core assets along with a strong financial position means that Aviva can finally "catch a bid" from the income hungry UK investor base. With a new and strong management now firmly in place, Aviva soon can return to its previous position as a reliable, long-term, medium risk core investment holding. We want to buy it early to ride the wave. Let's take a closer look.

Under new management

The Global Investor thinks that part of the stock's underperformance in recent years has come from a lack of stability in the boardroom. Amanda Blanc, who took over in July, is now Aviva's fourth new chief executive in eight years. Although the previous boss Maurice Tulloch left for family health reasons, this boardroom churn has not given investors the confidence that the company has been executing a consistent and clear long-term corporate strategy. Remember the insurance sector is all about asset-liability management over the long term.

Another reason why investors have been dumping the stock is that the company was just too complicated. Aviva is the UK's largest life insurance player and it also has significant general insurance, pensions and asset management businesses. Its geographical presence covers Europe, Asia and Canada and it can be argued that there is little synergy created and the company could be accused of "empire building" in years gone by. The business model just looks like an unfocused, scatter-gun approach and the stock market's conclusion was that it was basically unmanageable, or at least it wasn't a pure-play focused group that get higher valuations. RBC Capital Markets' conglomerate discount chart in the Lex piece says it all. Aviva is ripe for an activist investor campaign.

Finally, the macro environment has not been easy. In Aviva's core business, asset-liability management has been challenging when many government bonds are yielding zero or even negative rates. No wonder then that Aviva is trading at a near-record discount to book value and a P/E ratio of just 4.1x. Price to Book is at 0.6x, and Price to Cash Flow is also at just 0.6x despite a reasonable Return on Equity of 14.9%. The Global Investor thinks these metrics are too cheap for a company with a strong brand and strong capital base, so as the song by 1980s pop band Yazz goes "The only way is up!" as the market starts to recognize an increasingly focused set of businesses with resilient cash generation.

What is interesting is that City analysts don't hate the stock: from 19 recommendations, 11 are positive, there are seven Holds but there is only one negative call, based on 26th November data from the Financial Times. While there is still a bullish bias in analyst recommendations generally, an overvalued stock would have more negative calls.

This positive outlook has been brought about thanks to the confident and clear message from Amanda Blanc. At Aviva's interim results presentation on 6th August she declared:

From this moment on, we must deliver. Nothing else will do. My focus is making sure it happens and at pace.

Blanc has already backed this up with action. Aviva's board announced a 6p-a-share second interim dividend for 2019, after cutting the final 21.4p distribution back in April due to pressure from the Prudential Regulation Authority. Thanks to a strong capital base, continued cash-generation ability and the group's robust operational performance the company has shown it is more resilient than many expected. In November, the company decided to change its dividend policy, saying it will likely pay out a total of 21p for 2020, rising in low to mid-single digits after that. Aviva paid out 30p for 2018 and 15.5p for 2019. Aviva plans to pay down debt and return cash to shareholders so long as its solvency ratio is more than 180%. At the end of September its solvency ratio was at 195%.

Blanc has already made moves to rightsize the group. Soon after she started, Aviva agreed to sell a majority stake in its Singapore division, to focus on the UK, Ireland and Canada, where management thinks its franchises are strongest. For its Singapore business Aviva received £1.2 billion in cash. At nearly two times the division's net asset value, the transaction shows that Aviva can extract decent prices for its international businesses when it can find the right acquirers. Excess capital of almost twice the regulatory requirements means Aviva is in no hurry to sell assets. Aviva will probably look to exit its vastly reduced Asian business and/or life insurance operations in France, Italy and Poland when it can get good prices.

Backing herself

Blanc has an impressive CV: before re-joining Aviva, she held management roles at rival insurers Zurich and AXA and was the first woman chair of the Association of British Insurers and she is highly regarded in the City of London. More importantly however, Blanc has the courage of her convictions in her Aviva strategy, as she immediately followed the Singapore sale by purchasing £1 million-worth of stock in Aviva at 307.8p a share. Her investment equates to a little more than Maurice Tulloch's annual basic salary in 2019, before tax.

Her belief is probably due in part to the confidence in an ability to get good prices on asset sales but also the fact that Aviva was still decently profitable in the first half of 2020. Had it not been for a £165 million of one-off general insurance charge driven by pandemic related issues, the group's operating profit would have still been flat year on year, despite the challenging environment.

This resilience was driven by higher-margin bulk-purchase annuity agreements in the UK Life division, where profits grew 9%. With more uncertainty in the world, Aviva seems set to benefit from a positive momentum in underwriting risk and collecting premiums.

Pre-tax profit dropped by about 30% to £1.1 billion due to asset value losses in the period and downgrades in the long-term return assumptions for assets such as equities and property. For a company that's structurally invested in financial markets this is hardly a surprise. However, it's worth remembering that after all of these challenges, the group was still profitable. Rising markets should also be a tailwind going forward.

Obviously, this year has seen its challenges elsewhere too. Aviva decided not to remit cash from subsidiaries to the group level because of the massive uncertainty in the first half and as well as regulatory pressure. This meant 'center liquidity' - the best proxy for its cash level - stayed broadly flat at £2.5 billion in H1. Before COVID-19 this measure was growing even after the payments of £3.4 billion in ordinary dividends between 2017 and 2019.

It's probable that by investing so much of her own money in Aviva, Blanc thinks that the group's long-term liability-matching is stronger than the market currently gives it credit for, as this is a key risk for insurers. Aviva invests in high quality investments and holds bonds to maturity meaning that it is less affected by day-to-day moves in markets. Additionally, Solvency II rules mean that the lower interest rates we've seen in recent times should have little impact on capital surpluses, even if they do mean some key ratio levels have fallen a bit.

The discount

It should be noted the macro environment and investment strategies are broadly similar for all large life insurance companies like Allianz and Zurich Insurance and neither of these insurers trade at a discount to book value. This goes to show that "Mr. Market" in the UK is offering Aviva to us at a decent price, compared to rivals in Europe where the sentiment just happens to be better.

Risks

The first risk is that Aviva could be a value trap. In 2018 the stock traded at 500p, now it's at 320p. A second risk is the macro environment. Low interest rates don't help insurers but this investment thesis isn't a macro bet. It's a value investment with the catalyst a refocusing of the business model. The final risk is that Aviva is a large and complex business and it might take time for Blanc to turn this supertanker around and unwind the conglomerate discount that Aviva trades at.

In the end though, The Global Investor thinks the group's cash generation provides a margin of safety. Return on equity and net premium growth trends in recent years don't suggest the company, which still has a strong brand, is losing its earning potential. If the turnaround takes too long, expect an activist investor to come and shake things up and that will provide support for the stock price.

Summary

The Global Investor believes this stock meets all the criteria of classic value investing stock picking and with the uncertainty around the dividend cleared, and a committed and motivated CEO buying £1 million-worth of stock, Aviva merits a small holding in every value focused portfolio.

One final note. I believe in the current stock market cycle is turning and Value investing can outperform Growth investing in the coming years, reversing the trend of the last decade. I plan to write about this on Seeking Alpha soon.

spud

[cjac39] 03/12/2020 12:01

Don’t hold your breath for s2 relaxation. The PRA is at the vanguard of applying s2 in the most onerous ridiculous way. It’s generally not S2 at fault it’s the PRA.

Having said that there are some quick wins like binning the risk margin which adds risk to the reg bs

packaging infra in a sensible way to fit into annuity books makes a lot of sense

[cjac39] 03/12/2020 11:52

yes its interesting diff but they are very different biz models. phnx has a policy of hedging as much risk as possible across p funds, longevity, ir etc to reduce bs sensitivity to a minimum and moreover and importantly does not write much capital consumptive new annuity or db business.

so there is a real expected diff between where you would expect the two to sit eg its prob 140-160 phnx and av is moving to 160-180.

doesnt change your point that av has scr coverage reduction to come.

[dbadvn] 03/12/2020 11:52

The fact that the govt are indicating that they will probably relax the solvency 11 requirement whilst at the same time the BoE is issuing statements almost to the opposite effect shows how much of a mess regulation is and the lack of understanding as wba pointed out. How long before the FSA get in on the act ?

[cyberian] 03/12/2020 11:25

Again as I have mentioned before HMG has indicated that it will probably relax the
Solvency 11 requirement to a lower level as it desperately wants to free up capital to invest in infrastructure etc.projects within the UK. This would fit in with Aviva Light as you state muscletrade....a good post.

[muscletrade] 03/12/2020 10:51

Interesting to note in Phoenix figures this morning that they said "shareholder capital coverage ratio remains “robust” at 159pc".

Last week Aviva solvency II ration 195%.

Cannot compare like for like as they different animals but it does help shine a light the level of excess capital that Aviva holds and the potential benefit of reducing capital requirement by moving to "Aviva Light" model.

[wba1] 03/12/2020 10:49

Probably just the swivel eyed who would prefer to see the economy tank further and even cause falls in their shares rather than accept anything other than a no deal break.

[123trev] 03/12/2020 10:43

Why the thumbs down surely that would be good for all concerned on top of the vaccine it’s a Santa rally in the making.

[123trev] 03/12/2020 10:34

Apparently a Brexit deal now seems close imagine a good deal and the sale of the French unit the stuff of dreams lol.