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Aviva lifts earnings, cash and dividend targets after successful turnaround

Aviva has £3bn of excess cash to deploy over the next two years
Aviva said the quality of its earnings has improved and cash flows are stronger than expected

Aviva PLC (LON:AV.) has upgraded its targets for earnings growth, cash and dividends following a successful restructuring.

The FTSE 100-listed insurer is aiming towards "higher than mid-single digit percentage growth" per year, equalling more than a 5% increase, in operating earnings per share (EPS) from 2019.

READ: Aviva shares jump after report says insurer is set to announce £1bn share buyback

Shares rose 2.75% to 523p each in morning trading. 

The pay-out ratio target for dividends has increased to 55-60% of operating EPS by 2022. Aviva said this is underpinned by "improved earnings quality and cash flows from Aviva's businesses, which are becoming less capital-intensive".

"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,” said chief executive Mark Wilson.

Excess cash to be returned to shareholders

The group’s cash remittance target has been raised to £8bn from £7bn, allowing it to deploy £2bn of excess cash in 2018 and £1bn in 2019. The cash will be used to repay £900mln of debt in 2018 and fund bolt-on acquisitions and additional returns to investors.

The company did not say whether it was planning to use the excess cash for a further £1bn share buyback, as reported by The Sunday Times. Aviva announced a £300mln buyback plan earlier this year.

READ: Aviva lifts dividend 13% after first half profits rise on growth across UK and Europe

“After a few years of restructuring, our businesses are now high quality and we expect good, sustainable growth from each of them,” Wilson said.

In its last set of results, Aviva reported an 11% increase in operating profit to £1.5bn in the six months to June 30 and said it was confident of sustaining growth in the coming years after streamlining the business and developing its digital channel.

UBS expects £1bn towards share buybacks and acquisitions 

UBS said the £3bn of capital deployment out to 2019 is in line with its expectations as it left its rating at 'buy' and target price at 507p. 

It expects £0.5bn of excess cash will be used for a share buyback and £0.5bn for acquisitions in 2018, in addition to its debt repayment.

But the financial services company thinks its earnings growth target will be challenging given low yields.

"However if delivered, combined with the increase in payout range, would result in >10% dividend growth post 2018, supportive of our thesis," it said. 

"Execution will be key. Our work indicated management can deliver targets and improve the quality of earnings over time with early evidence emerging at 1H17."


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The group manages £7.8bn of funds: £2.8bn in the UK; £2.9bn in Sweden; and £2.1bn in the Netherlands.
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July 20 2018
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