450 Aviva shares were originally added to the UKVI defensive value model portfolio back in early 2012. Aviva is exactly the sort of large, high profile company that I’d expect to see in such a defensive and income focused portfolio, but now – after a long spell as the portfolio’s weakest link – the rising share price has finally provided a decent exit point.
At the time of purchase Aviva’s shares had a very impressive dividend yield of 7.2%; almost double the market average. It seemed as if the stage was set for a quiet period of ownership, holding the shares of a leading company at an attractive valuation, and with the odds of success looking very good.
But that’s not how things turned out. Buying shares in Aviva has been an interesting, occasionally difficult, educational and ultimately profitable investment.
Holding firm in the face of adversity
The graph below tells the story of disaster and recovery that Aviva’s shares have been through.
Far from being a steady, boring investment, Aviva’s time in the model portfolio has been characterised by drama, disappointment and share price volatility.
Things got off to a bad start with the effective ousting of the CEO in early 2012 as a result of the ‘shareholder spring’. Shareholders voted against the remuneration report in such numbers that CEO Andrew Moss had little choice but to go.
At the bottom of this particular valley the shares were down by almost 30%. That’s a pretty big drop and if stop losses had been used then it’s almost certain that Aviva would have turned out to be a losing investment, perhaps losing 10 or 20% depending on where the stop loss was set.
Fortunately, I don’t use stop losses. I don’t like them because they imply that a falling share price is a reason to sell, and I think that in most cases, with large successful businesses, it isn’t. In this case it would have meant missing out solid double-digit annualised returns.
Eventually Aviva’s share price recovered into 2013 as Moss was replaced with Mark Wilson and his simple and understandable plan to focus Aviva on ‘cash flow plus growth’.
However, the market was less pleased when that plan turned out to involve a near 50% dividend cut. The market’s reaction was predictable, and the shares dropped by more than 12% on the day. Again the shares fell to almost 20% below their purchase price and again I stuck to my general strategy, which is to ignore the vast majority of short-term events.
It would have been easier to sell along with so many other investors, but to succeed as an investor you will usually have to be a contrarian; holding or buying when most other investors are selling, and selling when most are excitedly buying.
Patience leads to profit and annualised returns of almost 18% a year
More recently Aviva’s shareholders have had a little more to cheer about; the market has now decided it likes the company’s new strategy. The shares have gained more than 70% from their lows of 2012, going from around 265p to 444p.
I added Aviva to the model portfolio on 12th March 2012 at 360.7p and sold on 3rd January 2014 for 443.7p. The original investment after stamp duty and broker fees was £1,641.27, dividend income was £182.70 and the net return on sale after more broker fees was £1,986.82, for a total profit of £528.25. Although the model portfolio is a virtual portfolio made up of virtual cash and investments, my own personal pension is almost identical in makeup and so for me this is no mere academic exercise.
The investment’s total return was 32.2%, which over 21 months is an annualised return of 17.7%. That’s well above the annualised rate of return I would normally expect to get – which is closer to 10% – so an almost 18% return per year is very welcome.
As far as I can see this investment in Aviva has underlined several important points:
Don’t panic if bad things happen
For defensive value investors the share price falling a long way, the CEO leaving or the dividend being cut shouldn’t be the end of the world. If the company was strong to start with then in most cases it will weather the storm and provide a solid base for the shares to rebound when the bad news passes.
So how strong was Aviva? The chart below shows the company’s financial history over the past few years.
That certainly isn’t a picture of a defensive powerhouse. The trend of premiums written, earnings and dividends is flat at best and perhaps even downwards a little, and that’s before inflation is factored in.
Aviva has quite a mediocre history, but it does have a long history of paying dividends and it does have a large and international business with many market leading business units. So while I wouldn’t expect Aviva to grow like Reckitt Benckiser, I would expect it to maintain its value at the very least.
Given that the share price was so low to start with, the maintenance of its earnings power and dividend (admittedly at a somewhat reduced level) in the years ahead, combined with time and a random flow of good and bad news, was likely to provide an opportunity to lock in some decent returns at some point. And that’s more or less what happened:
- First of all some bad things happened, but the company didn’t go bust
- Dividends were cut, but not suspended
- The market eventually had a change of heart and the share price went up
- Buying low, holding through uncertainty and selling on the way up produced decent total returns on this investment, where fear-based selling could have locked in significant losses.
Have a clear view of what ‘cheap’ is and what ‘expensive’ is for each company
If you have a good idea of what constitutes expensive and cheap, you can ignore share price falls (as in most cases with defensive companies a cheaper share is a better investment to be held, not a worse investment to be sold).
You can also take profits when the shares go up beyond where they can reasonably be called cheap, because holding expensive shares is usually just as bad as buying expensive shares.
Aviva’s in the bag, now on to the next investment
Now that Aviva is sold and profits have been taken, I can relax; but only for a short while.
My plan for 2014 and beyond is to alternate a sale one month with a purchase the following month. This will maintain the number of holdings in the model portfolio at 29 or 30 and it will keep the portfolio focused on high quality stocks and high yield stocks. It will also allow occasional profit taking where it’s prudent to do so.
On that basis I’ll be recycling the cash from Aviva’s sale back into another defensive value investment at the start of next month.