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Two steps forwards, two steps back. Aviva's share price fell 13 per cent to £3.15 on Thursday and is now only just above the price when former chief executive officer Andrew Moss left the building last May. In the meantime, shares hit £3.88 as investors warmed to a restructuring story but the announced 44-per-cent dividend cut has some investors slamming the book shut. What a contrast with the last time Aviva cut its dividend in 2009; that decision was greeted with a 5-per-cent rise in the share price.
But is Aviva really worth no more than the Aviva of last May? Is the dividend really so important that the cut negates everything else that has been done in the past 10 months? The company has come a long way since then, selling businesses in the U.S. and the Netherlands, improving its solvency and cutting costs.
And while there will be much wailing from income fund managers, the cut makes sense. If the reduction in the final dividend is repeated at the half-year stage, then the 2013 payout will be £354-million ($547-million) less than it was in 2011. That should lower the group's £7-billion of gross debt and help the strain of interest payments on earnings. Aviva made an operating profit of 39 pence per share in 2012. Paying two-thirds of that out as a dividend would have looked excessive from a company that is trying to turn itself round.
CEO Mark Wilson can now pursue his strategy of boosting cash flow in mature businesses and increasing sales elsewhere. The result, if all goes to plan, will be a business offering growth and dividends (albeit from a lower base). The real challenge will be growth. Operating profit fell 15 per cent last year as the three big business – general and life insurance and asset management – went backward. Even the higher growth parts of life insurance failed to make any progress. If Mr. Wilson can turn those numbers around, investors will see past the dividend cut. It is a big if though.