With A 10% Dividend Yield, Aviva Is Signficantly Undervalued

May.30.12 | About: Aviva plc (AV)

British insurance and investments company Aviva Plc. (NYSE:AV) currently sits near the top of the yield list of dividend paying foreign companies trading on a U.S. exchange. As a double-digit yielding international stock, Aviva may be most interesting for what it is not:

  • It is not a large national telecom company in a country with a scary economy.
  • It is not an energy company with a dividend dependent on the price of crude oil.
  • It is not an emerging market company.

Aviva is the second largest life insurance company in the U.K. after Prudential Plc. (NYSE:PUK). Aviva sells life insurance, general insurance and savings products in the U.K. and continental Europe. Operations in Asia and North America contribute about 12% of operating profits.

Aviva posted modestly better results in 2011 than for 2010. During the year the company divested itself of several sub-operations including the sale of roadside assistance company RAC Ltd. and a partial sale of the company's stake in Dutch insurer Delta Lloyd. The asset sales raised about $2 billion which was used to strengthen the Aviva balance sheet and work toward to goal of focusing on the core, profitable businesses.

In May CEO Andrew Moss resigned after a majority of shareholders rejected the proposed executive pay plan. Aviva was only the fourth major British company to have its pay plan rejected by shareholders in the 10 years since the vote for pay rule was initiated. During the annual meeting one shareholder stated that since 2007 "the dividend had slumped 21% and the share price 62%, total executive pay had 'ballooned by 90%' and non-executive remuneration by 82%." The chairman of Aviva, Colin Sharman, will be leaving in June, allowing the company to select new top management. Sharman is being succeeded by former RBS (NYSE:RBS) director John McFarlane. Along with the interim first quarter results McFarlane announced several initiatives including the search for a new CEO - expected to last the rest of the year - and a strategic review of all of Aviva's businesses with the goals of increased profitability and shareholder value.

While Aviva works to find new top management, the shares appear to be a good value, paying close to a 10% dividend yield at the current share price. At the end of the first quarter the IFRS net asset value per share was 445 pence sterling and the shares are trading at around 270 pence in London. The annual dividend rate of 26 pence is more than two times covered by the operating earnings per share reported in 2011. Aviva pays an interim dividend in September and a final distribution in March. For 2011, the dividends were 10 pence and 16 pence, respectively. The U.S. traded ADS are each worth two U.K. trade shares. The 12% yield quoted on the U.S. financial pages is due to the exchange rate changes from the dates on which the dividends were paid to ADS shareholders. Still at a current 9.6% yield, shareholders earn a nice return while waiting for Aviva to turn the ship around and start to grow profits.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.