Aviva fools everyone - but it is the most foolish
Who says you can’t fool all the people all the time? Aviva (LON:AV) has managed to fool everybody over its dividend – including, unfortunately, itself.
The Norwich Union insurance group knows it needs to reduce its dividend to boost its solvency but it does not want to upset its 600,000 shareholders by telling them. When it published its annual results in March it thus proudly announced that its payment had been maintained at 33p a share.
This was prestidigitation on a grand scale however. Plough through the announcement until page 130 and the truth eventually emerges: the final dividend has been reduced from 21.1p to 19.91p.
The company had increased its interim payment by 10 per cent to 13.09p – the same increase as the previous year’s total payments and part of what finance directors like to call a progressive dividend policy. But by cutting the final by exactly the same amount as the interim increase the board could make its spurious claim that, “The strength of our earnings stream has enabled us to maintain our dividend”.
No, the dividend has been cut. A trend of steady increases since 2002 has been reversed. The amount of money received by shareholders in May was less than in 2008. For anyone who bought mid-year it is no point saying their reduced final was compensated by the high interim they never received.
And having started cutting, investors should have been expecting future dividends to be at least at the lower level and very likely cut again – not least to rebalance the interim payment back to a third of the total.
Except that investors did not spot it. Income fund managers should have seen that this year’s cheque was lower but the clever analysts who observe but don’t participate never noticed. So now, concerned that Aviva can’t afford a maintained dividend, they are warning about the cut they have already missed.
And of course, their calculations that Aviva shares yield 10 per cent are wrong because the company is now on a downward dividend trend.
So Aviva has succeeded in fooling everyone from the press to the City. Everyone including itself.
By fooling the Square Mile that it had maintained its dividend when it actually cut, its shares were slammed because investors thought there should have been a reduction. Now the shares have been slammed again, down nearly 20 per cent in a week, because those clever analysts think Aviva will cut its dividend when it announces its interim in August, having missed the reduction that’s already been made.
So with a share price in the doldrums Aviva has fooled itself. Perhaps when it publishes those half-time results it will come clean before page 130 and admit that it has already reduced its payment. Or perhaps it should not wait and should clear up the confusion and tell the stock exchange now.
As a major City shareholder through its life and pension funds with £350bn of investments, surely Aviva would not tolerate such prestidigitation from any other quoted company?
July 13th, 2009 at 11:27 am
To think that the city did not grasp that Aviva had reduced its final dividend is disingenuous.
The old fashioned concept that a company would pay reliable dividends if its profits permtted as a reassurance to pension fund holders of its shares and if it needed more capital for proper purposes it would approach its shareholders seems to have been forgotten.
If Aviva has underprovided for its annuity costs then a proper appraisal would be welcome and a hit to reserves taken. After all the reserves have been overstated. The revised profitability can then be reviewed to determine a proper dividend policy.
It could also be the case that many firms on whom Aviva rely to provide income for their guranteed annuities may fold requiring cash support from the parent. Again these risks can be insured, bur a full exposition would be appreciated. Fortunately Mr Moss is a seasoned hand.
July 15th, 2009 at 7:21 pm
An incredibly naive analysis that the financial world was fooled by sleight of hand. The long and the short of it is that Aviva maintained their dividend and have proved the market wrong by there Q1 management statement of a strong IGD position. They have managed to maintain stability in the face of short term adversity yet despite this, a paniced market is looking for excuses to find the next target.
Equity markets have seen the world’s biggest short squeeze, and with a high beta name like Aviva are now looking to increase their shorts. Even the stories (e.g. Nomura & KBW) that triggered the short run on Aviva stock said that the case for selling on the news should not be overstated - it would just be a way to marginally improve the position if needed. I think the capital position from Q1 has proven that it was not - but only time and the half year results, will tell.