Should Aviva investors take up its (rather complex) free shares offer?

MOrE than half a million retail investors hold shares in Aviva, one of Britain’s bestknown insurers. Earlier this year, the FTSE stalwart announced that it planned to pay out an extra £3.75billion to shareholders — cash that it had built up from the sale of some of its overseas businesses.

Aviva is proposing to pay this money through giving new ‘B shares’ (worth £1.01 each) to existing investors then buying these back again. But the scheme has caused confusion, with some unsure how to vote on the proposal at Aviva’s upcoming AGM on May 9.

If you’re a shareholder trying to make sense of Aviva’s plan, here’s Money Mail’s guide to what it might mean for you. . .

WHY HAS AVIVA GOT SO MUCH CASH?

LIKE most big businesses, the way Aviva operates is constantly evolving as it seeks to stay profitable in a changing market.

In recent years, its focus has been on streamlining its activities, selling off some parts of the business (particularly those outside the UK and Ireland) to focus on what it thinks it does best.

‘Put simply, Aviva is a much simpler beast than it once was,’ says Sophie Lund-Yates of Hargreaves Lansdown.

The company’s new CEO, Amanda Blanc, says she wants to concentrate on growing Aviva’s presence in the retirement and pensions market.

And having sold off most of its overseas businesses not relevant to that aim, Aviva has built up cash proceeds of some £7.5 billion.

It has decided to use the funds to pay down debt and return some capital to shareholders.

WHAT DOES IT PLAN TO DO?

THE main part of Aviva’s plan (which needs approval from shareholders) revolves around creating something called ‘B shares’.

‘Every ordinary shareholder will receive one temporary share known as a B share for each share they currently hold,’ says an Aviva spokesperson. ‘We will then pay a fixed amount to redeem each B share.’

The company plans to give these B shares a value of 101 p. It will then immediately buy back those B shares in May, resulting in a capital gain for shareholders.

If you currently hold 2,000 Aviva shares, you will therefore receive approximately £2,020.

There’s then a second part of the plan in which Aviva will ‘consolidate’ its ordinary shares (currently worth 438 p each).

Under this plan, existing shareholders will receive 76 shares for every 100 they previously owned. Crucially, though, that doesn’t mean investors end up with less than they had before.

Once £3.75billion has been returned to shareholders, Aviva will be a smaller firm on paper. The share consolidation will therefore reduce the total number of shares available so investors maintain an overall stake of the same value.

WHY IS IT PAYING MONEY THIS WAY?

AFTER a strong year, Aviva has already boosted its dividend — the share of its profits passed on to investors.

However, it now wants to allocate this one-off capital from its business sales by issuing B shares. There are significant advantages for retail shareholders in paying out capital this way. Investors are currently entitled to an annual dividend allowance of £2,000, with anything above that taxed at a minimum of 8.75 pc. When it comes to capital gains, though, investors can register £12,300 per year before having to pay tax. In theory, the B share scheme should mean that investors can protect more of their payout from the tax man.

IS IT THE FIRST TO DO THIS?

NOT at all. The issuing (and buying back) of B shares is an established way of returning capital to shareholders.

That said, it tends to be used in special circumstances where a company has suddenly come into a large sum of capital — typically following a big sale.

Standard Life did the same thing in 2018, when it returned £1 billion to shareholders after selling its UK and European insurance business. Sainsbury’s also issued B shares when it sold its share in a U.S. supermarket chain in 2004.

WHAT WILL HAPPEN NEXT?

THE proposal will be put to a vote of Aviva’s shareholders at the firm’s AGM. If at least 75 pc of shareholders back the plan, it will go ahead. Shareholders should have been sent their voting forms and shareholder reference number by post or email. You can vote by post or by attending the meeting online ( web.lumiagm. com/171-925-637).

SHOULD I VOTE FOR THE PROPOSAL?

THERE is no ‘catch’ in the plan for retail investors. If it goes ahead, they will receive the money.

Aviva’s future share price, meanwhile, will depend on its performance afterwards.

Whether the plan will satisfy large investors remains to be seen. The Anglo-Swedish activist investor Cevian

Capital currently has a 5.3pc stake in Aviva and has criticised its management for not paying out more money to shareholders.

Cevian has not said whether it will back the plan.

HAVE INVESTORS LOST OUT BEFORE?

INVESTORS may well remember the debacle in 2018 when Aviva announced plans to repurchase its ‘preference shares’.

These gold-plated shares had been sold to retail investors with the promise of a higher dividend, and were trading at a premium on the market.

But suddenly the company said it wanted to buy them back at less than their valuation. After an outcry from investors, Aviva was forced to change tack, with the fiasco contributing to the departure of its then chief executive.