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Aviva (LSE: AV.) shareholders, of which I am one, have enjoyed another set of big returns in 2024. If the definition of a boring stock is a share price gain of 8%, a dividend yield of 7.4%, and a £300m share buyback, then I’ll take a boring single. So, can the momentum continue into 2025?
Acquisition of Direct Line Group
Aviva’s purchase of Direct Line Group (DLG) is likely to be a major driver of the share price in 2025 and beyond.
After initially being rejected, an improved offer valuing Direct Line at £3.7bn was enough to persuade the board to recommend that shareholders accept the takeover. But is it a good deal for existing Aviva shareholders?
Business synergies
One clear benefit to existing shareholders, is that it combines two complementary businesses. Aviva already has 10.1m UK personal lines policies. The acquisition will increase that figure to 18.1m.
It will also provide Aviva with growth opportunities through a number of leading brands including Straight Line, Churchillagain Green Flagand pet insurance.
The company has been working to improve its promoter score for years, getting closer to its customers. Finding it will strengthen this. For example, the rollout of its in-house car repair business, Solus, will likely be closely aligned with Direct Line’s car services and Green Flag roadside assistance.
The risks of integration
Any takeover by a competitor creates an inherent risk to the existing shareholders of the parent company. This makes valuing new scaled business more difficult in the short to medium term.
Aviva says the project will deliver capital synergies and £125m of incremental cost savings, spread evenly over the next three years.
Cost savings will come from three big buckets. Consolidation of office functions will remove duplication of shared service and lead to reduction of administrative roles. Second, support services, such as call centers, will be integrated. And finally, IT systems will be integrated.
Each of these buckets presents significant risks, with immeasurable potential. Balancing culture will undoubtedly be a challenge. And in terms of IT systems, I’ve lost track of the number of times previous mergers and acquisitions have not only failed to result in cost savings there, but have materially increased them.
Enhanced shareholder returns
One sweetener for existing Aviva shareholders is that the transaction is likely to lead to an enhanced dividend.
Based on capital and cash generated from sales, it expects to announce a single-digit dividend increase per share in 2025. This will be applied to the maximum number of shares. In short, its purpose is to eliminate share dilution. Going forward, its guidance for mid-single digit growth in fiscal spending will be effective from this increased level.
In the long run, I’m sure the deal will be good for shareholders. It has a history of acquisitions and mergers, including Probitas and Succession Wealth. If I didn’t have a lot of money in the company, I would buy Aviva shares today.
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