Insurance giant Aviva has enjoyed a rapid surge over the last few years – and that surge shows no signs of abating with the company upgrading its growth, cash and dividend targets.
In a release announcing the move, the UK-based insurer revealed that over the last four years its financial and strategic position “has been transformed” with its capital surplus tripling. In addition, it has streamlined in order to focus on markets in which it has “high quality franchises” and can gain market share.
All of this has prompted the decision to upgrade its financial objectives. Specifically, it is targeting “higher than mid-single digit percentage growth annually in IFRS operating earnings per share from 2019.” Its cash, remittance target has increased from £7 billion to £8 billion allowing it to deploy £3 billion of excess cash over 2018 and 2019; and it is expected to repay £900 million of debt in 2018 while also funding bolt-on acquisitions and offering further returns to investors.
“We are upgrading our cash flow and growth targets,” said Mark Wilson, group CEO at Aviva. “After a few years of restructuring, our businesses are now high quality and we expect good, sustainable growth from each of them. We have improved the consistency and quality of our profits and so we are raising our expectations for earnings growth to more than 5% annually from 2019 onwards.
“We have significant surplus capital and cash and this means we will have £3 billion of excess cash to deploy in 2018 and 2019, £2 billion of which we plan to deploy next year. In 2018 we expect to use our excess cash to pay down £900 million of expensive debt, return capital to investors and invest in growing our business, both organically and through acquisitions.
“The quality of our earnings has improved by 15 to 20% and with lower debt costs and stronger than expected cash flows, it is appropriate to raise our target dividend pay-out ratio to 55-60% by 2020.”
Moody’s has already reacted to the move, commenting that “Aviva stock should trade higher.”
“In terms of capital return, there is no firm guidance on the size of the buybacks - given the optionality on the M&A side, however it looks to us that there is opportunity for Aviva to retire all of the £900 million of (expensive) debt that is available for first call in FY19 (we currently assume some €500 million is refinanced) and still exceed our £500 million buyback assumption,” it said.
“Furthermore, in FY19 there is scope to beat our £300 million buyback assumption as there is £1 billion to redeploy but only £200 million of debt at first call. While the size of M&A is obviously unknown, this could be accretive to earnings given low financing costs. Taken as a package, we think this is a bullish set of goals from Aviva and, if achieved, the current multiple on the shares looks too low. Reiterate our Overweight rating.”
