Aviva has not confirmed whether the dividend is safe

Aviva is set to announce a dividend cut ahead of its interim financial report due on 6 August, analysts have warned.

The insurer’s shares sank 8.5% last Thursday but on Monday rallied by 5.8% to 292.75p.

So far, Aviva has not confirmed whether the dividend is safe. In May, chief executive Igal Mayer told Insurance Times: “We’ll take account of the same considerations as always: our operating results, the overall results and our capital position.”

Analysts from KBW, Merrill Lynch and S&P have all forecast a cut. In March the forecast was for a 30p dividend, close to the 33p the company paid out last year.

But S&P has now changed Aviva’s status from “hold” to “sell” and in a report said that its forecast of a 50% dividend cut remained unchanged.

“It’s for various reasons,” said Tony Silverman, equity analyst at S&P.

“It has issued hybrid bonds and is heavily reliant on this for its capital. It’s perfectly good capital for policyholders, stakeholders and other senior bond holders, but equity holders are not happy about the large reliance on capital to the business.”

Silverman estimated that Aviva had issued more than £6bn in hybrid bonds. “It’s far too much; they need to justify it,” he added.

In April, Aviva surprised analysts by announcing surplus capital of £2.5bn in its first quarter results, defying market predictions that it would be no more than £2bn. But S&P said that Aviva’s surplus was also still an issue despite the recent boost to its capital.

“Solvency is vulnerable to declining real estate values, defaults on loans secured on commercial property, bond defaults in the US and tighter implementation of solvency rules by the UK’s FSA,” said its report.

Silverman said the insurer had done “a flurry of things”. But he said the net effect was that surplus capital still looked very low compared to others in the sector.

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