There are just under 35m cars on the road in the UK right now, and by law, every single vehicle has to have insurance. This is a huge captive market for car insurance companies such as Admiral (LSE: ADM).
Unfortunately, the market is also highly competitive, which means it is quite difficult for insurers to make a profit consistently.
Admiral has managed to buck this trend. The insurer has been consistently profitable by prioritising income and sensible underwriting policies over growth. The company also places extra emphasis on customer service. Customers might be paying more for their insurance in some cases, but the improved customer service makes up for it.
International growth
Not only does Admiral have a vast captive market here in the UK, but it is also expanding overseas. And this is why I think the company could be a great income stock to buy and hold for the next 10 years.
This overseas business has been unprofitable since inception, but management is confident that it will be profitable shortly.
Combined international insurance turnover grew by 23% during the first half of the company’s to 2019 financial year and customer numbers increased by 21%. The division lost a total of £2.7m during the first half, compared to a loss of £10.1m two years ago. So the figures are certainly moving in the right direction
On top of this, Admiral has been growing its operations here in the UK, diversifying into new lines of business such as offering personal loans. Once again, this division is not yet profitable and won’t be for some time. Still, it is growing rapidly. The total value of loans outstanding hit £421m at the end of Admiral’s fiscal first half, up from £300m at the end of 2018. Losses decreased from £6.4m to £4.3m year-on-year.
As well as its UK insurance business, international operations and financial services arm, Admiral also owns a stake in Confused.com as well as several international price comparison websites. These divisions generated a total income of £7.4m during the six months to the end of June, up more than 100% year-on-year.
Dividend champion
Admiral is not a one-trick pony it is an international financial services giant with many different income streams and this is why I like the company as a dividend stock. It also has a track record of distributing virtually all of its profits to investors every year through a combination of regular and special dividends.
Over the past six years, the stock’s total annual distribution has grown at a compound annual rate of 14% from 47p in 2013 to 90p for 2018. City analysts are expecting the company to distribute a total of 124p for 2019, which gives a dividend yield of 5.9% on the current price.
Unfortunately, shares in the business are not particularly cheap, currently changing hands for 17 times forward earnings. However, considering the fact that Admiral achieved an operating profit margin of 38% last year, I think this is a price worth paying.