Dividend notes: 12% yield from this unloved financial? AV, LIO, CSN (16/11/23)

Welcome back to my dividend notes.

In my conversation with Paul Hill earlier this week, we touched on just how deeply unloved UK financials are at the moment and looked at two examples with dividend yields around 9%.

Today I'm taking a brief look at three more financials with very high yields. I don't own any of these stocks at present, but I wouldn't be too unhappy if I did. I'm fairly sure there's value on offer at these levels.

Companies covered:

• Aviva (LON:AV.) - the insurance group is continuing to deliver on its strategy and make steady gains in its core markets. I think the shares offer value.
• Liontrust Asset Management (LON:LIO) - deeply unloved, but these half-year results do not seem to contain any fresh horrors and my sums suggest the dividend remains affordable for now. giving a prospective yield of 12%.
• Chesnara (LON:CSN) - this life insurance consolidator has a 19-year record of dividend growth, good cash generation and a 9% yield. I'm positive on this as a pure income investment.

These notes contain a review of my thoughts on recent results from UK dividend shares in my investable universe. In general, these are dividend shares that may appear in my screening results at some point.

As always, my comments represent my views and are provided solely for information and education purposes. They are not advice or recommendations.

Aviva (AV.)

"Outlook for capital returns unchanged"

Aviva's third-quarter trading update suggests this well-known insurer is continuing to make steady progress.

The company reiterated guidance for 5%-7% operating profit growth this year, despite higher weather-related claims from events such as storms Babet and Ciarán.

Chief executive Amanda Blanc and confirmed plans for a full-year dividend of 33.4p, with "low-to-mid single digit growth" in the cash cost of the dividend thereafter.

Performance across the business has been positive during the first nine months of the year, with growth in all key areas:

• General insurance (e.g. home, motor): gross written premium up 13% to £8.0bn, "driven by strong rate, new business volume and retention".
• Protection & Health (e.g. income protection, health insurance): sales up 23% to £330m, with value of new business (the present value of future profits) up by 18% to £168m. Health insurance is doing particularly well, with sales up 56% to £123m "supported by strong performance with corporate clients".
• Wealth (asset management): net flows remained positive at 6% of opening AuM. Total AuM was £159bn at the end of September 2023.
• Retirement (annuities): sales rose by 2% to £4.4bn, with growth in both bulk and individual annuity sales.
• Solvency II cover – a regulatory measure – remains steady at 200% (HY23: 202%). Although this is a complex area, my understanding is that this is a fairly conservative level of cover.
• M&A: continuing its strategy of focusing on core markets where it has scale, Aviva recently agreed to sell its Singapore joint venture for £850m. The company has also agreed to acquire AIG's UK protection business for £460m. Both deals look logical to me.

Outlook: current forecasts, supported by this commentary, price Aviva shares on 11 times 2023 forecast earnings, with an 8% dividend yield.

My view

With UK government bonds offering c.5% risk free, what's a reasonable level of income to expect from a big general insurer?

The market's answer seems to be 8%+, but this looks cheap to me. Given that the long-term average total return from the UK market is about 7%-8% per year, an 8% dividend yield implies that zero growth is expected from a business.

In this case I think that's an unfair assumption. Based on the company's 8% yield and guidance for low-single digit dividend growth going forward, I think the shares look decent value at current levels.

Liontrust Asset Management (LIO)

"This has been a challenging period for the asset management sector, including Liontrust"

Today's half-year results from this small-cap asset manager made predictably grim reading, but I don't think there's anything new to worry about.

The slump in UK equities is well documented and is – perhaps – close to the bottom. Liontrust's focus on this market means that it's been hit hard, but could equally enjoy a strong recovery if markets turn. I think we could be nearing that point.

There's certainly a lot of value on offer, in my view, unless we're heading for a calamitous collapse in corporate earnings. I'm not planning for such a dire outcome; I'm fully invested at present.

Although I think some mild softness in corporate earnings is possible (probable?), I'd argue this already priced into the valuations of many businesses.

Half-year highlights: These results cover the six months to 30 September 2023 and look largely as I'd expect:

• Assets under Management (AuM) down 12% to £27.7bn
• Net outflows of £3.2bn during the half year
• Adjusted pre-tax profit down 16% to £36m
• Adjusted earnings down 21% to 42.3p per share
• Interim dividend unchanged at 22p per share

Regular readers will know that I prefer to rely on statutory profits rather than adjusted figures. Here we have a loss to report:

• Statutory loss before tax of £10.2m – this is mainly due to a £30m impairment charge on the intangible assets and goodwill associated with the 2022 acquisition of Majedie Asset Management
• CEO John Ions says that the UK bear market has "negatively impacted the funds and mandates we inherited from the acquisition of Majedie"

Perhaps this acquisition was not as well timed as it might have been. But Ions is correct to say that these impairments don't affect Liontrust's strong balance sheet or net cash position.

Cash position/dividend: my sums suggest that Liontrust's net cash fell to £97m during the half year, from £121m at the end of March.

This reduction reflects the payment of £32m of dividend during H1 (last year's final payout of 50p/share), offset by a free cash inflow of £8.7m.

In my view, this gives us an idea of the runway left before a dividend cut might be needed.

Broker forecasts suggest free cash flow of c.£20m this year. This seems plausible to me, based on the H1 performance, and implies H2 free cash flow of about £12m.

Adding this to net cash gives a figure of £109m.

Maintaining the full-year dividend at 72p/share will cost about £47m, suggesting a possible year-end net cash figure of £62m, after subtracting the full dividend (although the final payout won't be made until after the year end).

Based on this reading of events, I would guess that Liontrust will feel able to sustain the current dividend this year (y/e 31 March 2024) and perhaps a little longer, if needed.

My view

The 72p payout gives a 12% yield at the current share price of around 600p. I think this looks attractive, based on the assumptions I've laid out above.

I do not expect the UK asset management industry to crumble away completely and I think Liontrust looks very cheap at current levels.

While the situation isn't without risk – generalist asset managers are under pressure from passive funds and specialist fund managers – I think there's a decent chance of a recovery from current levels.

Chesnara (CSN)

"the 19^th year of consecutive [dividend] increases"

Chesnara's interim results were published on 21 September, but they've been stuck in my backlog until now.

This £400m market cap business acquires portfolios of life insurance policies and consolidates them, running them to completion. Acquisitions are made regularly to maintain scale and support continued growth.

This isn't the easiest business to understand, and I'm no expert. For what it's worth, the approach I take with this business (and its larger peer Phoenix) is to monitor cash generation, solvency coverage and the reported economic value per share.

Cash generation is particularly useful, in my view, as this is usually used as a KPI by management and provides a clear view on the sustainability of the dividend.

Half-year highlights: these figures cover the six months to 30 June 2023

• Commercial cash generation: £21.8m - on an annualised basis this should comfortably cover the £36m cost of this year's forecast dividend
• Group solvency: 205% (FY22: 197%) - this is above Chesnara's normal operating range of 140%-160% and looks comfortable to me
• Economic value: £523m (347p per share) - this is a measure of the expected value that will be created by Chesnara's assets over their lifetime and is comfortably above the current share price of c.270p.
• Cash balances at group holding companies rose to £127.5m (FY22: £108.1m) providing funding to support further acquisitions
• Interim dividend up 3% to 8.36p per share, the 19th year of growth

Outlook: management remain confident that the company can continue to perform well and grow despite the change in macroeconomic conditions:

"Whilst a volatile macro-economic backdrop will continue to be a material factor in all our markets, we remain confident that the Chesnara business model will continue to generate cash across a wide variety of market conditions, as it has done over its history."

Broker forecasts for the current year suggest a total dividend of 24p per share, giving a prospective yield of 8.9%.

My view

I have only skimmed the surface of Chesnara's results and as mentioned earlier, I am not an insurance expert.

However, as an income investor, I like the cash-generative and high-yield nature of life insurers and want some exposure to this sector.

For this reason, I place quite a high level of importance on companies' ability to provide consistent guidance and meet this guidance. Together with some key metrics, such as those discussed above, I think this is a useful guide to progress and safety.

I may be wrong. But Chesnara has been trading successfully as a listed business for almost 20 years. Over that time the firm's shares have risen by 150% and I estimate the company has paid out 347p per share in dividends – a return of nearly 250% on the IPO price.

That gives an annualised total return of nearly 9% per year, with the majority delivered in income.

It's a strong record, and I do not see any obvious reason why the business cannot continue to generate attractive returns. I would be happy to add Chesnara shares to my portfolio at current levels.

Disclaimer: This is a personal blog/newsletter and I am not a financial adviser. All content is provided for information and educational purposes only. Nothing I say should be interpreted as investing advice or recommendations.

You should carry out your own research and make your own investing decisions. Investors who are not able to do this should seek qualified financial advice. Reasonable efforts are made to ensure that information provided is correct at the time of publication, but no guarantee is implied or provided. Information can change at any time and past articles are not updated.