Insurer Admiral (LSE: ADM) is well-known from its television adverts. The cartoon admiral often peers through his telescope. Inspired by him, I am going to peer through my own telescope and examine prospects for the Admiral share price, close up.
Admiral’s business model
Admiral is one of a number of listed UK insurers such as Direct Line, Legal & General, and Sabre. What makes insurance companies as a class attractive to investors?
Typically an insurance company has large capital needs. Sometimes it will need to pay out substantial claims that it needs to be able to meet. Insurance pricing is often cyclical. So sometimes, new premiums do not cover claims that need to be met.
But in good years, an insurance company generates surplus cash, as it takes in more as premiums than it pays out to settle claims. That can be paid out as dividends, which many investors value.
I find insurance companies are often good as income picks. They may not have compelling growth stories, but a steady drip of dividends can make them attractive. Admiral’s yield of 4% meets this part of the usual investment case for insurers, in my view. It’s not the best in the sector, but it’s still substantial. If I invested £10,000 at the current Admiral share price, I would be hoping for a prospective passive income stream of £400 annually from its dividends. Of course, dividends are never guaranteed.
A resilient business model
Last year’s results help demonstrate the attractiveness of Admiral’s business model. Pre-tax profits jumped 21% to £638m, as many motorists drove less than usual. Earnings per share of 179.5p covered the dividend of 156.5p adequately. The company’s dividend policy is to pay out 65% of post-tax profits as an ordinary dividend. It sets aside some funds for items such as business development and to meet regulatory requirements. It then pays out any surplus as a special dividend.
That means that the dividends can be substantial, but not smooth. The total payout typically jumps about from year to year.
Can the Admiral share price hit £35?
The Admiral share price has put on 30% in the past year.
That has been a strong performance. The market seems to appreciate the sharp jump in profits last year.
Can the Admiral share price keep moving up? Its high point over the past year was around £32.57. That also marked the all-time high for the Admiral share price. The company’s share price has broadly moved upwards in recent years, so I do think it’s possible it could hit £35.
However, I also see some risks that could stop the climb. With more motorists on the road again, many of whom haven’t driven much for a while, I expect claims to increase. That could hurt Admiral’s profitability.
Another risk is a shift away from pre-pandemic travel patterns. With an expectation people will commute to the office less, many drivers won’t be on the road as much. They might shop around for lower mileage policies. That could cut revenues and profits.
My action plan for the Admiral share price
So while I do think the Admiral share price could hit £35 eventually, I don’t see immediate drivers to get it there.
I like the company’s yield, but prefer higher yields elsewhere. For now, I am not buying Admiral shares.