Aviva ups growth targets, unleashing £3bn of excess cash

Aviva has upped upped its long-term cash flow, earnings and dividend targets and says it has £3bn of excess cash that will be used to pay down £0.9bn debt next year, as well as making bolt-on acquisitions and funding shareholder returns.

The life insurer will target operating earnings per share growth of "higher than mid-single digit" percentages from 2019 and by 2020 has upped its dividend pay-out ratio target to 55-60% of operating EPS, up from the prior 50% guidance.

Ahead of the FTSE 100 giant's capital markets event for investors and analysts on Thursday, chief executive Mark Wilson said the company was upgrading its targets after the changes made to the business in recent years.

"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," he said in a statement.

"We have significant surplus capital and cash and this means we will have £3bn of excess cash to deploy in 2018 and 2019, £2bn of which we plan to deploy next year."

In 2018, Wilson plans to use the excess cash to pay down £900m of "expensive" debt, return an unspecified amount of capital to investors and invest in growth through organic and acquisitive means.

"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."

Broker Shore Capital said on Thursday that "market concerns over the group's M&A ambitions and the lack of clarity over precisely how much might be returned to shareholders may hold the stock progression back a tad".

Jefferies said on Thursday the dividend increase was not expected and noted that aside from the debt repayment of £900m in 2018, which is worth 2% in EPS, there was no split given on the residual £2.1bn between buybacks and acquisitions, although previously it has been stated that any add-on purchase would need to beat the buyback on shareholder return.

"Our forecasts assume £2.5bn of redeployment of which £1bn is buybacks."

Analysts at Barclays said the key message from the investor day was "simple but effective", that the company is starting to bear the fruits of both the Friends Life acquisition and the recent announced disposals, and the business "is now simpler, more cash-generative and able to grow (modestly) faster", with an improved quality of earnings and less debt.

They added: "while the company still needs to execute and deliver the promised earnings growth, we believe the thesis is starting to play out. We believe Aviva will increasingly become a staple holding for income funds".

At the CMD, chief financial officer Thomas Stoddard said there was even more Aviva could do, with the capital deployment over the next two years "at least £3bn", believing subsidiaries are holding too much capital.

Barclays relayed that Stoddard said the company was flexible on how it deploys the £3bn-plus of excess cash, apart from being committed to retiring the expensive debt coming up in 2018, considering more debt retirement if the economics make sense.

He "was keen to point out that Aviva is happy with its current debt leverage, and paying down expensive debt is purely because of the economics, with the earnings accretion similar to a buyback", as the company would save £100m on annual interest costs on the debt retirements in 2017 and 2018, and gives the board a war chest if the economic environments gets tougher or if there was an accretive M&A opportunity which could be financed by debt.