How investors’ loyalty to Aviva’s stock paid dividends
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Last month, the prophets of doom were out in force for Andrew Moss, Aviva’s chief executive. He was lashed by the markets for maintaining the pay-out to shareholders. Its capital position just wasn’t strong enough to justify such optimism, it was said.
In spite of the gloomy prognosis, holders of just over a third of Aviva’s shares chose to take their dividend in stock. That now looks pretty clever. By doing so, they help reduce the impact of the cash pay-out on the group’s capital surplus, which has risen to levels nearly double some bears’ original forecasts for end-March. The fact Aviva has a fatter cushion against disaster has in turn bolstered the share price. As a result, the scrip dividend is now worth about 25 per cent more than its cash equivalent.
That raises two questions. Given the shares were already up more than two-thirds from their March low last week, as the deadline to choose stock passed, why didn’t more investors take that option? And, if the lowest take-up of scrip in Aviva’s history was 20 per cent and the highest 48 per cent – virtually guaranteeing the cash pay-out would be lower – why were investors so gloomy about the outlook?
Setting aside technical factors, the answer to the two questions is similar. In spite of Monday’s joy over Aviva’s better-than-expected solvency surplus, many investors remain bearish about insurers’ medium-range exposure to the economic downturn. On that front, Aviva can at least say: so far, so good. While there have been some impairments in US corporate bonds, there have been few defaults; meanwhile, in the UK, rental income on commercial properties still covers interest due on loans 1.3 times and Aviva has seen no defaults.
The improvement in the capital position is a comfort and Aviva’s sales growth in the quarter, on stable margins, if not grounds for celebration, at least justifies a thin smile of vindication from Mr Moss – and a wider grin from scrip-holding investors.
3i on the main chance
The night is darkest just before dawn. Or maybe as dawn breaks. Some companies struggle most towards the end of recessions. That is when they need to increase working capital but can’t, because they have been bled dry by falling sales. Throw in the difficulty they face borrowing from banks, and an opportunity should arise for private equity to step in with the powder it has been keeping dry for just such a battle.
How annoying it would be, then, if 3i, which has handed about £2.2bn of precious capital back to investors over the past few years, were caught short when the recovery finally arrived.
The fact 3i was returning cash during the good times, not blowing it on a top of the market investment splurge, should help the group’s case when it markets its widely anticipated rights issue to the same investors. The recent rally in its share price can’t do any harm, either. 3i also has a new chief executive and has already administered self-help to reduce its debt burden. This debt does not have covenants and the group has done a good job on realisations (proceeds from the sale of assets), but leverage is still high. A share issue that helps to reduce it should allow the markets to focus on 3i’s potential.
The group is geared to an economic recovery and it presumably hopes the competition for bargains is less intense. 3i was always the acceptable face of private equity, even when politicians had it in for the sector. Now the critics have found other targets, but at a time when businesses need capital, few should argue against bolstering one of its most experienced providers.
JJB makes a strong case
JJB Sports’ deal with its creditors couldn’t have come at a better time – not just for the troubled retailer but for anyone who favours US-style corporate rescues over the potentially destructive UK alternatives. That should be most of us.
The economic climate is worsening and corporate failures increasing. Creditors have started to realise arm-wrestling with a partner on whom you depend is not worth it if your opponent ends up in hospital. Critically, the government is at last hinting at changes to the rules that would make it easier for companies to fund and protect themselves while in a voluntary arrangement like the one agreed at JJB.
Sticking points remain. Predictably, property owners still defend their right to leases that work in their favour. This deal succeeded – where that proposed for Stylo, another retailer, failed – in part because JJB, while negotiating for more flexible terms, stuck with the contracts. The landlords’ mantra is they will look at such deals “case by case”. But the successful outcome at JJB shows that, case by case and with a little help from the authorities, it may just be possible to construct a new, improved insolvency regime in the UK.
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