My old Commerce teacher always used to say you can’t insure against dying, which is why they are called life assurance companies rather than life insurance.
So much for the old ways.
Apart from an increased readiness to refer to them as life insurance companies, however, nothing much has changed in the sector in terms of its sex appeal.
If it is racy excitement you want, which is not the same as serial disappointment (yes, Aviva, we are thinking of you), then look elsewhere.
Solid, reassuringly boring returns is what the sector promises on the tin but except with Ronseal you can’t always rely on what it says on the tin.
Dividends, of course, are a major part of the appeal of investing in life assurance (old habits die hard) stocks and you’d think that long-established companies such as Legal & General Group PLC (LSE:LGEN) and Aviva PLC (LSE:AV.) would have it sussed to ensuring steady, sustained growth in the payout.
As the charts below show, Phoenix Group Holdings has managed to pull this trick off while Legal & General, although it has made a decent fist of it (to the extent it attracted some flak during 2020 for continuing to pay dividends during the uncertain days of the first lockdown), has occasionally had to retrench.
As for Aviva, its dividend chart looks like the graphic equaliser panel on my stereo system.
With all three having recently announced results, now is as good a time as any to have a look at what they are offering on the dividend front.
Aviva shares currently yield a juicy 6.6% and after a string of divestments, the insurer has promised to return up to GBP4bn to shareholders by the end of 2022. That won’t all be dividends, as evidenced by the fact that the company announced it would start straight away with the capital distribution by kicking off a GBP750mln share buyback programme.
We’re still waiting for the finer details on the GBP4bn capital return and although it was reasonably well flagged to the City, brokers have not yet had a chance to update their forecasts.
That might explain why the one-year ahead forecast yield is for a drop to 5.4% with dividend cover rising to 2.3 (dividend cover is essentially earnings per share divided by dividend per share); the two-year forecast sees the yield rising to 5.9% (cover of 1.8) and the three-year yield to 6.4% (cover of 1.9).
As heavily hinted, Aviva’s record on growing dividends is a bit patchy.
Over five years it has grown the dividend by 29.8% but over 10 years it is only up 5.9%.
A popular metric of income investors is how many years of dividend growth has the company clocked up since it last held or cut its dividend.
In Aviva’s case this comes out at precisely one – for which you can probably blame the pandemic – but oddly, this is one more than Legal & General, which generally speaking has a more consistent dividend-paying record than Aviva.
Legal & General
Talking of which, Legal & General is currently yielding 6.3% with a relatively skinny dividend cover of 1.2.
The one-year forecast is for a yield of 6.6% (forecast cover of 1,6); two years = 6.9% (cover: 1.7); three years = 7.1% (cover: 1.8). Those forecasts put it on a similar footing to Phoenix (of which more anon).
Dividend growth over five years of 31.1% is similar to Aviva but growth over 10 years knocks Aviva into a cocked hat at 269.9%.
Past performance is no guide to future returns but there’s a reason why people who bet on the horses study racing form. Mind you, how many of them make money?
Phoenix Group Holdings
Life assurance fund consolidator Phoenix is arguably the steadiest, most reliable of the three.
It is yielding 6.9% on a dividend cover of 2.1. Next year and the following two years the yield is predicted to rise to 7.1% on cover that dips to around 1.6.
Five-year growth in the dividend is not sensational at 16.3% but the 10-year growth of 61.9% is decent.
How long can these yield anomalies last?
The question with all three is whether these generous-looking dividends are sustainable.
All three companies have shown willing but dividend growth has occasionally been put on hold because of external factors.
For the foreseeable future, the returns look good to go but what about in the long run?
Well, “In the long run we are all dead,” as famed economist John Maynard Keynes once said … which is why we have life assurance and not life insurance.