Aegon: Dividend Growth Is Safe
May 4 2017, 12:02
About: AEG
Summary
In their latest financial statement Aegon announced a decrease of its solvency II ratio.
The decreasing ratio was the cause for rumors that the dividend might be cut in the near future.
Our opinion is that Aegon has much more factors that allow for an increase in dividend, rather than a dividend cut.
Aegon (NYSE:AEG) is a Dutch multinational insurance company, founded in 1983 after the merger of the two Dutch insurance companies AGO and Ennia. The company focuses on life insurance and savings accounts, which combined generate 95% of profits. Aegon NV is mainly active in America, where 65% of revenue is generated. Europe is good for another 30% of revenue.
For fiscal year 2016 Aegon reported a significant profit again, after last year's loss of €523 million. The company could benefit from a strong American market. This was also reflected in the stock price, which climbed up 57% over the course of the second half of 2016.
Advertisement
AEG Chart
AEG data by YCharts
Source: Google Finance
However, the company also reported a lower solvency II ratio of 157% while trying to meet its 2018 target of 10% ROE. To achieve this goal, the company plans to cut back operating costs by €350 million. This might seem very reasonable, but for a lot of investors the lower-than-expected solvency ratio rings a lot of alarm bells. Especially when it comes to Aegon's dividend which might remain unchanged or even be cut back for 2018. We believe that there is no reason to panic, and that there are several reasons as to why Aegon's dividend growth will remain strong.
Why dividend growth is here to stay
1. Liquidity
When it comes to liquidity, Aegon is still going very strong. The company held a positive amount of cash (and equivalents) again and even increased its total cash position with 18.27% YOY. This increase in cash position came mainly from an increase in cash from operating activities, suggesting a strong cash flow structure. Furthermore, Aegon has a decent current ratio of 2.31 to support this strong structure.
The strong liquidity of Aegon is the most important factor in our belief that the company is liquid enough to keep its dividend at the same level and maybe even increase the dividend towards fiscal year 2018.
2. Historic performance
Next, there is Aegon's dividend history. The Dutch insurer is known for being a good dividend payer. Ever since Aegon's first dividend in the 90's, the company has paid out dividends. Our guess is that they will most likely keep it that way.
aegon dividend history
Source: Aegon
The company has even been increasing dividends ever since 2012, and this at a steady pace. The dividend in USD was kept unchanged due to the low EUR/USD exchange rate. There was even dividend growth in 2015, when Aegon reported a loss of over €400 million, suggesting that the dividend will most likely not fall back or remain unchanged now that the company is profitable again.
3. Strong trend in the European financial sector
In the last few months, there has been a positive trend in the European financial sector. When comparing the return of the American (in red) financial sector versus the European markets (in blue), it is clear to see that returns for 2017 have been higher in Europe. This trend is caused by strong first-quarter results from European-based financial companies.
comparison American vs European financial sector
Source: Google Finance
So far, Aegon stock has been profiting from what was called the Trump-rally (as 65% of revenue is generated in the U.S.). Now that the focus of the market is quickly shifting from America to Europe, Aegon is able to butter its bread on both sides, considering Aegon is still a European-based company. This means that the rally will most likely continue for the stock, as well as for its decent dividend.
Conclusion
There have been some reasons to believe that Aegon might not increase its dividend in the coming years, as the stock price has been declining and the Solvency ii ratio decreased. However, we believe that there are far more reasons to believe that Aegon in fact will increase its dividend: the company is profitable again and rides both the American and European stock market trends, has a strong historical dividend record and is most importantly liquid enough to even increase the dividend.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.