Is Aviva the Ultimate Retirement Share?

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LONDON -- The last five years have been tough for those in retirement. Portfolio valuations have been hammered and annuity rates have plunged. There's no sign of things improving anytime soon, either, as the eurozone and the U.K. economy look set to muddle through at best for some years to come.

A great way of protecting yourself from the downturn, however, is by building your retirement fund with shares of large, well-run companies that should grow their earnings steadily over the coming decades. Over time, such investments ought to result in rising dividends and inflation-beating capital growth.

In this series, I'm tracking down the U.K. large caps that have the potential to beat the FTSE 100 over the long term and support a lower-risk income-generating retirement fund (you can see the companies I've covered so far on this page).


Today, I'm going to take a look at Aviva (ISE: AV.L) (NYS: AV) , a high-yield favorite with some Fools and the U.K.'s only composite insurer (it sells life insurance and general insurance).

Premium performance?
Aviva currently offers an outstandingly high yield of 8.1%, something it has in common with its peer RSA Insurance Group. The reason for this is that both shares have chronically underperformed the FTSE 100 over the last 10 years, despite remaining profitable and paying solid dividends:

Total return

2007

2008

2009

2010

2011

Trailing 10-Yr. Avg.

Aviva

(14.2%)

(36.8%)

9.7%

4.9%

(16.8%)

1.7%

FTSE 100

7.4%

(28.3%)

27.3%

12.6%

(2.2%)

7.0%

Source: Morningstar. Total return includes both changes to the share price and reinvested dividends. These two ingredients combined are what make it possible for equity portfolios to regularly outperform cash and bonds over the long term.

A strong case can be made for saying that Aviva is undervalued and due for a re-rating. However, a eurozone meltdown would hit it hard, and the risk of this is one of the main factors that are keeping its share price down. Aviva has also suffered from a lack of focus on core, profitable business units -- something interim executive chairman John McFarlane is taking steps to address.

What's the score?
To help me pinpoint suitable investments, I like to score companies on key financial metrics that highlight the characteristics I look for in a retirement share. Let's see how Aviva shapes up:

Item

Value

Year founded

2000*

Market cap

9.4 billion pounds

Net debt

N/A

Dividend Yield

8.1%

Five-year average financials
Value

Op. margin/ROCE

38%

Interest cover

N/A

EPS growth

(20%)

Dividend growth

(1%)

Dividend cover

1.2 times

Sources: Morningstar, Digital Look, Aviva.*Founded when CGU and Norwich Union merged in 2000 to create CGNU plc. Renamed Aviva in 2002.

Here's how I've scored Aviva on each of these criteria:

Criteria

Comment

Score

Longevity

Norwich Union was old, but Aviva is young and immature.

3/5

Performance vs. FTSE

Pretty dire.

1/5

Financial strength

OK, as long as the euro holds together.

3/5

EPS growth

Oh dear.

1/5

Dividend growth

Still lower than five years ago, but payout is generous.

3/5

 

 

Total: 11/25

A score of 11/25 is by far the worst seen so far in this series, and suggests that Aviva would be a poor addition to a retirement portfolio. Yet the insurance sector as a whole is depressed at present, and Aviva is now being aggressively refocused by its new management. The insurance business isn't ever going to disappear and, for a measure of risk, buying Aviva now could be a ticket to an above-average dividend income for decades to come.

Expert selections
Aviva isn't everyone's cup of tea, and an alternative selection of great dividend-paying shares can be found by taking a look at the choices of successful professional investors. One of the most successful income investors currently working in the City is fund manager Neil Woodford, who manages more money for private investors than any other City manager. Neil Woodford's dividend stock picks have outperformed the wider index by a staggering 305% over the last 15 years.

You can learn about Neil Woodford's top holdings and how he generates such fantastic profits in this free Motley Fool report. Many of Mr. Woodford's choices look like excellent retirement shares to me, and the report explains how he chose some of his biggest holdings.

This report is completely free and I strongly recommend you download"8 Shares Held by Britain's Super-Investor" today, as it is available for a limited time only.

Warren Buffett buys British! The legendary investor has recently topped up on his favorite U.K. blue chip. Discover what he bought -- and the price he paid -- within our latest free report!

Further investment opportunities:

The article Is Aviva the Ultimate Retirement Share? originally appeared on Fool.com.

Roland Head owns shares in Aviva, but not in any other stock mentioned in this article.The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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