Everyone Wants 100% Returns But There’s a Snag

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Any shareholder activist who targets an insurer needs to dangle something juicy to rouse investors to its cause. In Cevian Capital AB’s crack at Aviva Plc, the carrot is the potential for a 100% gain for shareholders in three years. There’s a convincing path to the U.K. insurer achieving that. But in the process, Aviva risks becoming another low-growth U.K. dividend hostage.

Insurers often trade cheaply because they are so complex that investors can’t be bothered with them. For activism to gain traction, a good tactic is to highlight the potential cash returns from share buybacks and dividends — everybody understands that. Elliott Management Corp. took such an approach with Dutch insurer NN Group NV. Cevian’s tilt at Aviva is in a similar vein.

The fund has taken a 5% stake and supports new Aviva Chief Executive Officer Amanda Blanc. Her strategy has been to sell overseas assets — 8 billion ($11 billion) pounds worth of disposals have been agreed — and then turbocharge the performance of the remaining portfolio focused neatly on the U.K., Ireland and Canada.

The question is what happens next. Cevian wants 5 billion pounds handed back to shareholders. Analysts at UBS Group AG reckon Aviva could do that while still keeping its solvency ratio (a measure of capital relative to liabilities) above a healthy 180%. The snag is there would be less left to invest in growth or bolt-on acquisitions.

If Aviva returned the cash by buying its stock at around the current share price, its share count would fall by roughly 30%. Aviva could then afford to pay a higher dividend per share. Cevian wants the payout to be more than doubled to 45 pence. In this scenario, the dividend would cost around 1.2 billion pounds. That amounts to pretty much all of Aviva’s distributable cash flow based on its guidance for 2023.

The company would then be a very generous dividend stock. The model here is peer Phoenix Group Holdings Plc, which has a dividend yield of 6.5% and is popular with investors. Aviva’s stock price would be around 700 pence if it commanded the same yield. Add in dividends over the next three years and the value to shareholders is consistent with the 800 pence that Cevian says is possible. The stock was 411 pence before the fund’s interest emerged.

Should Blanc run Aviva quite so tightly for cash payouts to shareholders?

The risk is that the insurer becomes a prisoner of dividend investors, making it all about income rather than growth. It’s true that past expansion drives have been bad for shareholders, and Aviva’s life and pensions business is best regarded as a mature cash machine rather than a growth engine. But there are still opportunities in Aviva’s attractive home and motor insurance franchise. At the very least, this will require investment to defend its leading position.

Cevian is right to highlight Aviva’s cash generation potential. But an alternative course could be a demerger into two stocks: one containing the life and pensions assets and paying a chunky dividend; the other based around general insurance and still investing to grow. While the loss of diversification following a split would force bigger capital requirements, shareholders might yet value the businesses higher separately.

Blanc should weigh Cevian’s approach against the merits of a full-blown breakup. Either way, with the credibility she’s rapidly established, she has a better chance than predecessors of doing something more ambitious than just running Aviva for fat dividends.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

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