Should I Invest in Admiral Group?

LONDON -- To me, capital growth and dividend income are equally important. Together, they provide the total return from any share investment and, as you might expect, my aim is to invest in companies that can beat the total return delivered by the wider market.

To put that aim into perspective, the FTSE 100 has provided investors with a total return of around 3% per annum since January 2008.

Quality and value
If my investments are to outperform, I need to back companies that score well on several quality indicators, and buy at prices that offer decent value.

So this series aims to identify appealing FTSE 100 investment opportunities, and today I'm looking at Admiral Group  (LSE: ADM  ) , which is a vehicle insurer.

With the shares at 1,337 pence, Admiral's market cap is 3,659 million pounds.

This table summarises the firm's recent financial record:

Year to December 2008 2009 2010 2011 2012
Revenue (in millions of pounds) 301 386 575 960 1,157
Net cash from operations (in millions of pounds) 119 227 212 190 220
Adjusted earnings per share 54.9p 59p 72.3p 81.9p 95.1p
Dividend per share 24.7p 26.5p 50.6p 36.8p 42.7p

Whatever the prospects of the company, the language of Admiral's CEO, Henry Engelhardt, CBE, always provides satisfaction. In the recent full-year results announcement he said this when talking of the firm's history: "We've done the heavy lifting: the first 20 years. We've put the hole in the ground and we've got the cranes in place. All that's left to do is to build the metaphorical skyscraper."

Engelhardt's "skyscraper" means expansion abroad for Admiral. The fast-growing car insurer derived 87% of turnover by insuring U.K. cars last year, for a tidy profit. Meanwhile, the loss-making international car division turned over just 7% with 6% coming from other businesses, mainly the firm's well-known comparison website, Confused.com, but also including a fledgling U.K. household insurance division launched in December.

There's clearly a lot of work to do if that metaphorical skyscraper is to pierce the metaphorical clouds. Yet, past performance suggests that Admiral could do well with its expansion plans, despite the inherent cyclical nature of insurance-company profits generally. All of which bodes well for the total-return potential of the shares. I'm looking forward to Englehardt's further building reports going forward.

Admiral's total-return potential
Let's examine five indicators to help judge the quality of the company's total-return potential:

1. Dividend cover: adjusted earnings covered last year's dividend just over twice. 4/5

2. Borrowings: there is net cash on the balance sheet. 5/5

3. Growth: revenue and earnings have been growing with flat cash flow. 4/5

4. Price to earnings: a forward 13 seems up with growth and yield forecasts. 3/5

5. Outlook: good recent trading and a positive outlook. 5/5

Overall, I score Admiral 21 out of 25, which encourages me to believe the firm has potential to out-pace the wider market's total return going forward.

Foolish summary
Admiral scores well on all the business quality indicators and seems priced about right given its immediate prospects.

One interesting feature is the roughly 7% forward dividend yield, which encourages me to consider investing in the firm alongside an idea I'm excited about from the Motley Fool’s top value investor who has discovered what he believes is the best income generating share-play for 2013. He set's out his three-point investing thesis in a report called "The Motley Fool's Top Income Share For 2013," which I recommend you download now. For a limited time, the report is free so, to download it immediately, and discover the identity of this dividend-generating star, click here.


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