LONDON -- Shares in Admiral Group (LSE:ADM) 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.
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Royston does not own shares in Admiral Group. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.