Aviva (LSE: AV) was the largest FTSE 100 riser on Friday thanks to news that it was going to sell a majority shareholding in Aviva Singapore for £1.6bn. Consequently, the Aviva share price has now hit over 300p, having risen nearly 50% since its March lows. This has been aided by a change in management and a resilient first-half trading update. But can the share price continue to rise, or is it now time to bank profits?
Sale of Aviva Singapore
The sale of the Singapore Arm represents part of Aviva’s wider strategy, in which the company will focus on Britain, Ireland and Canada. The group also has plans to strengthen central liquidity and reduce its debt levels. This sale is therefore fundamental to accomplishing these aims. In fact, the transaction would have both strengthened Aviva’s Group Solvency ratio by around 4 percentage points and increased Net Asset Value by £700m. This should help it achieve those liquidity and debt aims.
It’s also important to mention that Aviva has maintained a 25% equity shareholding in the new group. This means that should it perform strongly over the next few years, Aviva should also benefit from this strong performance. Overall, this makes the deal very shrewd indeed. It’s therefore no surprise that the Aviva share price saw gains of over 5% on the back of the announcement.
Is a dividend cut in store?
The high possibility of a dividend cut is still a factor that could be holding back the stock though. In 2019, the Aviva dividend totalled over 30p. At its current price, this equates to a very high dividend yield of over 10%. But new CEO Amanda Blanc has put the future dividend policy under review, and for ‘review’ read ‘possible cut’. But that would make sense as it would help the company achieve its aforementioned objectives.
Nevertheless, I don’t think that a potential dividend cut should worry investors. Firstly, by reducing the percentage of profits paid out as dividends, the group should have additional money to reinvest into the business. This should hopefully correspond with a further rise in the Aviva share price, while also contributing to a stronger business. In addition, even if the dividend is cut by a third, it would still yield around 7%. In comparison to the rest of the FTSE 100, this is still very strong.
What could hold the Aviva share price back?
Along with a potential dividend cut, the overall state of the insurance sector is a worry for investors. For example, in the UK, Covid-19 is expected to result in around £1.2bn of claims for business interruption, travel insurance and event cancellation. This will have an adverse effect on Aviva and should therefore dent profits in the short term.
I’m still optimistic for the long term though. Firstly, with a Solvency Ratio of over 180%, Aviva is in an extremely strong position to absorb any losses. With plans to sell parts of its business in France and Poland, it should also be able to strengthen its financial position in the years ahead. As a result, there’s plenty of hope for the insurance company, and following the sale of its Singapore Arm, I think investors should keep on buying.
