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The last time the Aviva (LSE: AV.) share price was above 600p was way back in 2007, just as the great financial crisis was unfolding. Today, the scenario is totally different, with clear positive momentum. As a long-term shareholder, I’ve seen bad times as well as good. But I believe the business looks well primed for future growth.
Shareholder returns
The first positive about the insurer is its shareholder-first policy. Since 2020, capital returns and dividend payments have totalled over £10bn. Each year it expects to grow the cash cost of the dividend by mid-single-digits.
The recent stellar share price appreciation has brought down the trailing dividend yield to 5.9%. This is expected to rise to 6.6% over the next couple of years. This payout is well above the FTSE 100 average.
Last year it bought back £300m of its own shares. However, the proposed buyout of Direct Line Group has meant that buybacks will be suspended this year. They’re expected to commence again in 2026.
Direct Line buyout
The long-term investment thesis for Aviva remains compelling for me. However, the buyout of its rival does present a number of risks.
On the surface, it looks a like a great deal. Bringing together two complementary businesses will increase the scale and reach of Aviva. Direct Line has some terrific brands, including Churchill and Green Flag.
The transaction is expected to lead to material capital synergies in the future. The business has also earmarked cost savings of £125m, equally split over the next three years. Of course, there’s no guarantee that all these savings will be realised. Merging IT systems, for example, is an inherently complex undertaking, that could end up increasing costs.
The deal is undoubtedly good for Direct Line shareholders who will receive both a cash payment and shares in Aviva. Parent company shareholders face dilution of their existing holdings. The recommencement of buybacks in 2026 is meant as a sweetener in this respect.
Early this month the Competition and Markets Authority stated it was looking into the merits of the deal. Its initial report is expected in June. An unfavourable outcome would throw a spanner in the works for sure. A rehash would undoubtedly have to be undertaken to satisfy the regulator.
Growth drivers
Zooming out, the opportunities presented to the business abound across insurance, wealth and retirement. Indeed, one can map out the opportunity across an individual’s lifetime.
Parents looking to save for their children’s future can consider its Junior ISAs. When a teenager passes their driving test, car insurance will be required. As they step on to the career ladder, workplace pensions provide an early incentive to save. The list goes on and on, through to retirement and drawing down a pension. Aviva offers products across all these categories and more.
I characterise wealth transfer as a mega opportunity. Over half of all financial assets today are owned by baby boomers. Most of their financial wealth is tied up in their property, which has appreciated hugely over the decades. The need for trusted financial advice can only grow as the transfer accelerates.
With such trends, I believe the price can continue to rise this decade. That’s why I believe it’s a stock investors should consider adding to their portfolios for growth and dividends.
