Please ensure Javascript is enabled for purposes of website accessibility

Should You Buy Admiral Group Today?

By Royston Wild - Apr 11, 2013 at 2:04PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

How attractive are the shares of Admiral Group?

LONDON -- Shares in Admiral Group (ADM 2.16%) have continued to surge in recent weeks, striking 18-month peaks in recent weeks and are currently trading 16% higher from the start of the year.

The insurer announced last month that group pre-tax profit leapt 15% in 2012 to 354 million pounds, helped by a slight 1% uptick in revenues to 2.2 billion pounds. The move prompted the firm to supercharge the dividend to 20% for the year, boosting enthusiasm for the stock.

Revenues forecast to experience heavy pressure
Although last year's results exceeded analysts' expectations, I expect revenues to heavily dip moving forwards, crimping earnings growth and putting future payout prospects under the cosh.

Almost 60% of Admiral's profits last year originated from non-core operations, and broker Investec expects revenues from these activities to drop as legal referral fees are banned and other referral fees begin to drop. Meanwhile, increasing rate competitiveness in the motor insurance sector is also likely to hit group turnover looking ahead.

City forecasters expect earnings per share -- which advanced 16% to 95.1 pence last year -- to accelerate lower in the medium term. A 2% predicted drop this year, to 93.4 pence, is expected to collapse to 80.9 pence in the following 12-month period, a 13% decline.

Heady dividend rises set to fizzle out
Admiral is a favorite pick among income investors owing to its ultra-progressive dividend policy -- the insurer hiked its dividend by a fifth, to 90.6 pence last year, accelerating from the 11% rise to 75.6 pence awarded in the prior 12-month period.

These payouts pushed the firm's dividend yield well above the 3.3% FTSE 100 average, and prompted the share price to spike again as the firm's forecast-busting payout hike drove fresh interest in the insurer.

However, I believe that the dividend will be forced to moderate moving forwards as earnings look set to fall. Indeed, broker consensus puts the dividend for 2013 and 2014 dividend at 87.7 pence and 73.9 pence correspondingly, and coverage of just 1.1 times for these years exacerbates the likelihood of a cut should revenues dip lower.

Admiral currently changes hands on a P/E rating of 14.4 and 16.6 for this year and next, trading at a chunky premium to a forward earnings multiple of 10.2 for the broader non-life insurance sector. These lofty valuations exacerbate the view that the insurer looks chronically overbought at current levels.

Bolster your investment income with the Fool
Although Admiral Group is a risky pick for income investors looking ahead, there are plenty of other FTSE 100 winners available to really jump start your investment income. So check out this brand-new and exclusive report covering a multitude of other premium payers right now.

Our "5 Dividend Winners to Retire On" wealth report highlights a selection of tasty stocks with an excellent record of providing juicy shareholder returns. Among our picks are top retail, pharmaceutical, and utilities plays, which we are convinced should continue to provide red-hot dividends. Click here to download the report -- it's 100% free and comes with no obligation.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Admiral Group plc Stock Quote
Admiral Group plc
ADM
$2,219.00 (2.16%) $47.00

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
321%
 
S&P 500 Returns
111%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.