There are about half a million retail investors in Aviva — many the legacy of the mutual Norwich Union, which formed one of the three core businesses — and it has to be said that it has not been the greatest of investments. Aviva has tended to be among the worst rated in the sector because of a weak balance sheet and poor performance and growth.
One could argue that this came to an end with the agreed purchase of Friends Life in 2015, a combination of two insurers that had to result in substantial cost savings and greater capital efficiency and was one of the reasons why the shares were one of this column’s tips for that year.
Even so, last year, after the Brexit vote and the resulting stock market chaos, Aviva was one of the insurers forced to rush out a statement reassuring the market that its capital position was as resilient as it could be. A solvency ratio, or the difference between reserves and what could be needed, announced in March was at 180 per cent.
That turns out to have been conservative. The amount of capital generated in 2016 stood at £3.5 billion, well ahead of what the market had expected. This was in part down to a conservative view of the underlying business, plus a contribution to capital efficiency of £600 million from Friends Life.
The solvency ratio at the year end therefore stood at 189 per cent, well above Aviva’s forecast maximum of 180 per cent. The demands on capital are light because the cost of acquisitions is likely to be matched by disposals. This means the insurer has about £800 million, or probably more, of excess cash to get rid of, either by paying off some of its debt, which costs an expensive 8¼ per cent at present, or returning it to investors by means of share buybacks.
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The chances are this will split half and half. It is a situation that can only continue into 2018 and beyond, because all sides of the group are performing well, with operating profits from fund management up 30 per cent to £138 million and the value of new business within life insurance 13 per cent ahead to £1.35 billion. The shares were about 346p when that reassuring statement was issued in June. They added 33p to 544p on the 2016 figures. On most measures they still look cheap.
MY ADVICE Buy
WHY The return of capital is set to arrive a year ahead of forecast and should continue given Aviva’s strong balance sheet and cash surplus
Secure Income REIT
This column has tended to err on the side of a strong dividend yield as against capital appreciation over the past few years because in a low interest rate environment this is what investors want. Some companies attempt to provide both, including Secure Income Reit. This is a property company managed by Nick Leslau’s Prestbury Investments, which owns more than 15 per cent.
The Reit is invested in three sectors: healthcare, leisure through properties, such as Alton Towers and Thorpe Park operated by Merlin Entertainments, and 55 Travelodge Hotels bought in the autumn. All have the advantage of upwards rental reviews on leases stretching beyond two decades; the return last year, adding together dividends and the net asset value increase, was 16.5 per cent, and the company should be able to achieve an 11 per cent return even without further acquisitions.
Two share issues last year were oversubscribed. The company is 35 to 40 per cent owned by retail investors. Once full dividends start this year the yield on the shares, up 5¾p at 337p, will be about 4.2 per cent. It looks an attractive model.
MY ADVICE Buy
WHY Balance between income and capital gain
DS Smith
For some unaccountable reason, at the start of this year the Chinese suddenly increased their imports of wood fibre and finished paper, possibly because they halted some internal production. The prices of both went sharply higher; this should be bad news for those makers of packaging such as DS Smith, which use a lot of the stuff.
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Actually not, because such companies have pass-through agreements with clients, consumer goods groups such as Procter & Gamble and its peers, that allow higher costs to be recouped after a short lag. In fact DS Smith has a policy of acquiring through recycling more fibre than it needs to ensure supply to its paper mills and was able to export some itself.
The trading update for the period since the start of the second half of this financial year in November was therefore confident enough, if light on detail, and organic growth of 2.9 per cent in the first half looks set to be maintained. The company is doing well out of servicing those consumer goods customers with all their needs across different European geographies and from ecommerce: it is reckoned to have signed a new three-year deal with Amazon recently.
DS Smith also grows by acquisitions, though this year has been relatively quiet, with five small bolt-ons, and another large deal will be along at some stage. The shares, ¼p ahead at 447p, are up from about 380p in November and some might consider taking some profits. On 14 times earnings, though, they still represent good long-term value.
MY ADVICE Buy
WHY Good value even if some might choose to take profits
And finally . . .
Shares in Restore are up 16 per cent since this column tipped them in July. The AIM-quoted company, which has grown fast by acquisitions in recent years, offers office services such as relocation, shredding and storage. The 2016 figures show revenues and profits both up by more than 40 per cent, and a note from Cenkos, the broker, suggests earnings growth is set to continue, up a forecast 39 per cent over the next two years. In addition the highly cash-generative nature of the business means there is scope for further acquisitions.