UBS upgrades Aviva to 'buy', raises target price

UBS upgraded Aviva to ‘buy’ from ‘neutral’ on Wednesday and raised its target price to 505p from 395p, saying the insurance firm is positioned to deliver a “sector leading” dividend.

Aviva is likely to offer a risk-adjusted dividend as Solvency II (S2) legislation is set to drive a shift in the relative attractiveness of dividend strategies across the sector, UBS said.

“This is supported by double-digit growth, around 7% yield (fiscal year 2018) which is above consensus and critically, lower risk under S2 than peers which is under-appreciated, in our view.

“Management guidance implies double-digit dividend per share growth through increasing pay-out to 50% by 2017 and earnings per share growth >0%. This will screen at the top-end of UK life peers and pay-out flexibility implies lower reliance on earnings growth to drive this.”

UBS said insurers face the challenge of S2 leading to the reassessment of risk to dividends as disclosure emerges post fiscal year 2016 on transitional capital, matching adjustment and other items within S2 ratios.

However, UBS said it expects over time the market will pay a premium for insurers funding dividends sustainably from capital build rather than capital buffers.

“Aviva screens well on this basis with S2 dividend cover at the top-end of peer range and robust buffers to withstand shocks including credit rating migration.”

Shares rose 0.67% to 437.60p at 1016 BST.