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This FTSE 100 stock has a 6.5% dividend yield. Should I buy?

·3-min read
Various denominations of notes in a pile
Various denominations of notes in a pile

Aviva (LSE: AV) is a FTSE 100 stock that offers an attractive dividend. The shares are currently yielding 6.5%. And the great thing is the income is covered twice by earnings.

The stock has been having a great run. Since the beginning of the year, the share price has increased over 25% and during the past 12 months, it’s up more than 40%. Of course, past performance isn’t an indication of future returns. It’s also trading on a price-to-earnings (P/E) ratio of 8x, which makes it cheap.

Aviva isn’t a stellar growth stock. It’s a general insurance company. In my view, it’s a reliable stock that should generate strong cash flow in order to pay out the dividend. And I don’t think there’s anything wrong with that.

A portfolio should be diversified and include both income and growth stocks. This FTSE 100 income stock is cheap right now. For these reasons, I’d buy.

Refocus

Amanda Blanc joined the general insurer as CEO in July last year. And she’s giving the firm a much-needed slimming down and refocus. Non-core businesses are being sold and the focus is on its main markets of the UK, Ireland and Canada.

In its Q1 2021 trading update, it said eight disposals have been made amounting to £7.5bn. So what’s Aviva going to do with this additional money? Well, if the board is shareholder-friendly then a special dividend or share buybacks could be on the cards.

In fact, the company stated in its trading report that it expects to “provide a further update on the substantial capital returns to shareholders later in the year as we make progress with the completion of the divestments”.

This will be great news for income investors. But I guess I’ll have to wait and see what the details of the capital distribution are.

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Activist investor

Activist investor, Cevian Capital has built a 5% stake in Aviva. It’s a Swedish investment firm with $16bn under management and it’s now calling for the FTSE 100 firm to return £5bn in excess capital to shareholders.

Cevian is also calling for cost cuts. It’s pushing for savings of at least £500m by 2023. But Aviva has indicated that it will achieve reductions of £300m by 2022. For me, either way, these cost savings should make the company leaner and improve profitability. I can’t complain about that.

My concerns

Clearly this activist investor thinks more can be done and at a faster rate. So far the board and Cevian are getting on well. But my concern is that this relationship could go sour very quickly.

That’s especially if the activist investor keeps pushing for rapid change and management doesn’t agree or believes it will take longer than Cevian hopes. I’m wary that a potential battle at the top could impact the stock negatively.

Should I buy?

I’d buy Aviva shares based on the attractive dividend and also because the stock is cheap. The company has confirmed some sort of capital return at some point. So investors like me also have this to look forward to.

The post This FTSE 100 stock has a 6.5% dividend yield. Should I buy? appeared first on The Motley Fool UK.

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Nadia Yaqub has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2021

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