The past year has not been a great time to own a stake in insurer Aviva (LSE: AV). Its shares are down almost 20% across those 12 months.
One benefit of that fall is that the dividend yield has grown, thanks to a lower share price. It now stands at 4.8%, which means owning the shares could provide a useful boost to my passive income streams.
But earning dividends on one hand while seeing a falling share price on the other could ultimately make owning Aviva shares unprofitable. Might the downward price motion continue – or is now a good moment for me to add the shares to my portfolio?
Smaller and more focused
In the past several years, the firm has undergone a strategic transformation. Selling many foreign assets has generated some cash for shareholders. It has focused the firm more clearly on its home UK market.
But it has also meant that buying into Aviva now is not like investing in the Aviva of a few years ago. Revenues last year were 35% lower than in 2019. Profits after tax also came in 30% lower.
Aviva’s asset sales make me think that lower revenues are the new norm at the firm compared with a few years ago. Profits tend to move around in the insurance industry from year to year, even when a business is stable.
While profits have shrunk, last year they still came in higher than in both 2017 and 2018, for example. That might suggest a leaner, more strategic Aviva could actually turn out to be more profitable than before.
Dividend growth potential
The 4.8% yield I mentioned is based on last year’s total payout. At the interim stage this year, the company increased its dividend by 40%. If it maintains that level of increase at the full-year level, then the prospective dividend yield here is 6.7%. That would take the annual dividend to around 31p per share, surpassing where it was in 2018 before a big cut.
Aviva has suggested this is its plan. In a trading update in November, it maintained market guidance that it was aiming to pay a total dividend per share of around 31p for last year and 32.5p this year.
I appreciate the stock’s income potential. I see it as being underpinned by resilient customer demand, a strong brand and deep industry expertise.
I’m eyeing the shares
But while I like the company’s outlook, I have not yet invested in it. I see other insurance shares that could benefit from strong businesses and offer an even beefier yield, such as 9.8%-yielding Direct Line. Legal & General offers 7.1%. Like Aviva, it aims to increase its shareholder payout this year although, in reality, dividends are never guaranteed.
Meanwhile, like its peers, Aviva faces risks. Inflation could make claim settlement more expensive, eating into profits. A leaner business than before may struggle to generate the sorts of profits seen last year all the way through the economic cycle.
I think such risks help explain why Aviva shares fell nearly a fifth last year. If business remains strong, they may recover this year. But they might not, for example if profitability is flat or falls.
For now, I continue to watch them, but I am not buying.
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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.