Potentially misplaced concerns

One example I like is Rightmove (LSE:RMV). The share price has fallen by 28.6% over the past year, with 18% of this move happening in just the past month.

The main concern here is the potential issues in the housing market. With interest rates rising, higher mortgage costs might dampen demand for property. This could decrease Rightmove’s revenue streams from agents that list properties on the online portal.

I think the stock is cheap for two main reasons. I feel investors are overly pessimistic about the business. Even if the market for new home purchases slows, rental demand remains high. After all, if people can’t afford to buy, they’ll rent. In such a way, Rightmove should see higher interest in lettings versus sales. Ultimately, traffic still comes to the website.

My second thought is that property is a cyclical sector. We’re seeing the slowdown phase at the moment. Even though it might not feel great to buy when the share price is falling, what’s my alternative? Buying during a boom when the share price is already flying higher? I’d much rather buy now to pre-empt a future move, even if it’s for the long term.

A defensive cheap share

A second company I like is Admiral (LSE:ADM). The insurance provider has endured a tough period, with the share price down by 36% over the past year. In the half-year report, it spoke of “progress against the backdrop of a more turbulent cycle than usual, and high levels of inflation”.

I accept that it’s a tough time right now, with premiums having to rise in response to inflationary pressure. Yet I think the business is in a good position. It’s still growing the customer base, one of the key long-term metrics I look at to see if the business is fundamentally sound.

It also has a broad range of offerings and isn’t restricted to just servicing one area of the market. This will help it going forward. It appears that motor claims are the area most under pressure at the moment. Yet household insurance and Admiral finance divisions should help to cushion the negative impact going forward.

The price-to-earnings ratio at the moment is 9.75. Anything below 10 starts to get me interested as a potentially undervalued company. Further, the share price has now erased all of the “pandemic premium”. This was the surge it saw in 2020 and 2021 as investors rushed to buy defensive stocks. Now that the stock is priced under its 2020 lows, I feel it’s much better value for me to step in and purchase.

I want to buy both stocks shortly when I have more free cash.

Looking again at Admiral’s interim results, posted in August, I see a common trend. First-half profits fell compared to the same period a year previously, but they’re higher than they were in 2019 before the pandemic.

Earnings per share dropped 50% from 2021, but still came in 10% ahead of the first half of 2019.

The interim dividend is one thing that didn’t beat 2019, though. The 60p ordinary dividend per share was 5% below the 63p paid back then. And it’s a whopping 48% down from 2021’s first-half payment.

The dividend situation is complex, though, as we’re also looking at a combination of ordinary dividend plus specials. So it’s hard to gauge any longer-term trend right now.

Dividend yields

Forecasts suggest a full-year dividend yield of around 8.5%, which looks attractive. But analysts expect it to drop to under 7% in 2023 — and forecasts are already out of date and don’t account for the latest turmoil.

Anything above 5% still looks good to me, and I’d be happy to take that on a long-term basis. But the insurance business is under intense pressure right now. And I would not rule out the possibility of a serious cut being needed if we experience a prolonged recession.

I think we could even see rising insurance premiums over the next 12 months too, and that could easily scare investors away from the sector.

Positivity

Still, even considering that, I do see plenty of reasons for positivity. Admiral’s continuing special dividends represent a clear statement of confidence, in my view. If the company doesn’t think it needs to retain the cash to get through a couple of possibly tough years, maybe I’m worrying unduly.

Price-to-earnings (P/E) multiples don’t look especially tempting at the moment. A trailing P/E of 15 would drop only a little based on forecasts for the next two years. But then, that does represent earnings and the share price falling by a similar order of magnitude.

So if and when earnings recover and get back to growth, Admiral shares could be looking very cheap indeed.

Tough times

And though the sector is tough, I see defensive qualities in Admiral. It specialises in motor insurance, and that’s a compulsory requirement. Folks suffering under an inflationary squeeze can give up on holiday plans, and just cut their discretionary spending generally. But they can’t decide to go without insuring the car this year. Not legally, at least.

So do I rate Admiral as a buy right now? Yes, sort of. I’m just not a big fan of retail insurance shares like this. I’m more a follower of the Aviva and Legal & General aspects of the financial sector.

But despite the clear risks, I do see the Admiral share price fall as offering a long-term income opportunity for investors whose strategy covers that kind of business.

Rolls-Royce

Rolls-Royce (LSE: RR) is a British multinational aerospace and defence holdings company. It is one of the world’s largest makers of aircraft engines, and operates in four different segments. These include civil aerospace, power systems, defence, and new markets.

After a disappointing set of H1 results, Rolls-Royce shares saw yet another decline. But this week, a number of director dealings were carried out. Most notably, there was a huge purchase of shares from Chairwoman Anita Frew. The purchase from such a senior director should improve sentiment surrounding the stock.

• Name: Anita Frew
• Position of director: Chairwoman
• Nature of transaction: Purchase of shares
• Date of transaction: 5 August 2022
• Amount bought: 50,000 @ £0.83
• Total value: £41,300

• Name: Lee Hsien Yang
• Position of director: Non-Executive Director
• Nature of transaction: Share purchase plan
• Date of transaction: 8 August 2022
• Amount bought: 1,161 @ £0.84
• Total value: £980.23

• Name: Wendy Mars
• Position of director: Non-Executive Director
• Nature of transaction: Share purchase plan
• Date of transaction: 8 August 2022
• Amount bought: 2,156 @ £0.84
• Total value: £1,820.31

• Name: Sarah Armstrong
• Position of director: Chief People Officer
• Nature of transaction: Share purchase plan
• Date of transaction: 9 August 2022
• Amount bought: 175 @ £0.86
• Total value: £149.84

• Name: Rob Watson
• Position of director: President (Rolls-Royce Electrical)
• Nature of transaction: Share purchase plan
• Date of transaction: 9 August 2022
• Amount bought: 175 @ £0.86
• Total value: £149.84

Admiral

Admiral (LSE: ADM) is a British-based insurance company. It specialises in car insurance products, but also has a line of other offerings. These include home insurance, travel insurance, pet insurance, and van insurance.

The FTSE 100 firm released its H1 results earlier this week. Although profits slumped by almost half, the stock still shot up by 15% this week. This was most likely due to the announced special dividend of 15.8p. This would bring its total dividend to 60.0p per share. Investor sentiment was also further boosted when the Chairwoman purchased shares worth over £25,000.

• Name: Annette Court
• Position of director: Chairwoman
• Nature of transaction: Share purchase plan
• Date of transaction: 11 August 2022
• Amount bought: 1,181 @ £22.44
• Total value: £26,501.64

Dunelm

Dunelm (LSE: DNLM) is one of Britain’s biggest home furnishings retailers with an ever-growing market share. It operates over a 170 stores throughout the UK and offers over 50,000 products across a broad range of categories.

The FTSE 250 firm released its Q4 trading update not too long ago, and the interim numbers resonated well with investors. Nevertheless, its bottom line figure is yet to be released, and investors are wondering whether their expectations will be met. Therefore, the recent purchases by its CFO and another director could be an indicator of an earnings beat. The company is expected to report its official FY22 results in less than a month’s time.

• Name: Vijay Talwar
• Position of director: Non-Executive Director
• Nature of transaction: Purchase of shares
• Date of transaction: 4 August 2022
• Amount bought: 9,670 @ £8.50
• Total value: £82,156.32

• Name: Karen Witts
• Position of director: Chief Financial Officer
• Nature of transaction: Purchase of shares
• Date of transaction: 5 August 2022
• Amount bought: 1,174 @ £8.45
• Total value: £9,922.18

Types of shares

To provide context, there are a few types of shares that can be purchased by directors. Some directors opt to purchase shares via the open market. Having said that, directors also have the option to purchase shares via a share incentive plan (SIP).

A SIP is an employee plan for companies within the UK to flexibly award shares to employees. Publicly listed companies normally exercise this option because it’s tax-efficient for both the employer and its employees.

In this week’s set of director dealings, a certain number of directors opted to purchase shares via their companies’ share purchase plans. This allows employees to purchase shares through automatic deductions from their pay. And this was the case with a number of Rolls-Royce directors, as well as Admiral’s Chairwoman.

Car insurance giant

As a quick reminder, Admiral is one of the leading insurance providers in the UK, with roots stretching back to 1993. It is best known for car insurance products and specialises in low cost car insurance for drivers of all ages and abilities, as well as providing insurance for higher performance specialist vehicles. It also provides home, travel, and pet insurance too.

So what’s happening with Admiral shares currently? Well, as I write, they’re trading for 2,227p. At this time last year, the stock was trading for 3,268p, which equates to a 31% decline over a 12-month period. Admiral’s share price drop does not concern me. Many UK shares have pulled back since the turn of this year due to macroeconomic factors as well as the tragic events in Ukraine.

Passive income stocks have risks too

Despite my bullish attitude towards Admiral shares and the passive income opportunity, I must note real risks of investing in the shares. Firstly, the way Admiral operates, as well as its balance sheet, is a risk for me. Simply put, its balance sheet and financial health is linked to an extensive investment portfolio. This portfolio helps support claims. If this portfolio were to take a hit or decline for any reason, Admiral’s financials and returns could be affected.

Finally, competition in the insurance sector is intense. The recent rise of comparison sites and many smaller firms has hurt the dominance and market share of bigger providers such as Admiral. This is a development I must keep an eye on.

The bull case

First of all, Admiral has defensive attributes. This is because in the UK, car insurance is a legal requirement. Anybody driving a vehicle must be insured. Despite current economic headwinds or any downturn, people still need transport to get to and from work and other activities so insurance levels will always remain healthy.

Next, at current levels, Admiral shares look excellent value for money on a price-to-earnings ratio of just 11.

So to the passive income fundamentals then. This is measured by dividend yield. Admiral’s current yield stands at an exciting 10%. This is much higher than the FTSE 100 average of 3%-4%. It is worth remembering that dividends are never guaranteed, however.

Finally, Admiral has a good track record of performance too, although I do understand that past performance is not a guarantee of the future. Looking back, I can see it has grown revenue for the past three years and gross profit for the past four years.

Overall, I like Admiral shares as a passive income opportunity. I would add the shares to my holdings to boost my income stream from dividend paying stocks.

A lower dividend payment is predicted in 2023. But this still creates a market-beating 6.5% dividend yield for next year.

The beauty of buying Admiral shares is the resilience of the general insurance industry during economic downturns. As the cost of living crisis worsens, revenues here should remain relatively buoyant versus many other UK shares.

This is especially so for motor insurance specialists like Admiral as driver insurance is a legal requirement. Admiral is Britain’s biggest operator here with a market share in the mid-teens.

Soaring costs

The trouble here, however, is that claims inflation is soaring. Rivals Direct Line and Sabre have both recently issued profit warnings because of soaring costs. I think Admiral could be the next business to slash earnings forecasts when it updates the market on Wednesday, 10 August.

On the plus side, insurance companies are benefitting from an improving pricing environment. The problem though is that premiums aren’t increasing anywhere near the rate at which claims inflation is.

The Association of British Insurers (ABI) says that the average motor premium rose to £419 in the second quarter. That was up just £5, or 1.3%. To provide a comparison, Sabre said last month that claims inflation had hit 12% during the first half.

The worry for insurers is that multiple problems are driving claims inflation through the roof. And as the graphic below reveals these issues could persist long into the future.

Of course Admiral can try to hike prices to narrow the difference. But in a highly competitive market, the business could witness a sharp fall in volumes as a result. This is particularly dangerous today as Britons grapple with a worsening cost-of-living crisis.

Dividend forecasts fall

So what will this mean for Admiral’s dividend forecast? Well judging by recent broker activity, it could be looking pretty grim.

Take what analysts at JP Morgan, for example, have been doing. Last month they slashed their medium-term dividend forecasts for Admiral by more than a third. They cited the company’s deteriorating profits outlook and the effort it will need to maintain a healthy Solvency II capital ratio.

I think further downgrades could be coming down the line from more City brokers, particularly as anticipated earnings are already lower than expected dividends. In 2022, for instance, anticipated earnings per share of 137.6p are well below an expected 169.1p dividend).

Admiral’s gigantic dividend yield is mighty tempting. But all things considered I’d rather buy other UK dividend shares.

Here are two Footsie dividend stocks with tasty yields I’d add to my stock market portfolio today.

Admiral Group

The Admiral Group (LSE: ADM) share price has trailed the FTSE 100 index by a significant margin this year — it’s down nearly 38%. The fall has pushed the stock’s dividend yield up to a whopping 6.78%.

The insurer recently suffered a heavy sell-off due to a profit warning issued by competitor Sabre Insurance Group, which itself was caused by inflationary pressures. Admiral shares were dragged down amid growing fears of a risk the company will post disappointing H1 results on 10 August.

However, now trading below £20 per share, the stock could be oversold in my view. A key advantage the business has over its competitors is greater diversification. This may help shield it from higher claim volumes and rising car repair costs.

Granted, UK motor insurance makes up the lion’s share of Admiral’s revenue. Nonetheless, UK household insurance, international insurance, and loans also contribute significantly to the company’s bottom line.

I’m particularly encouraged by the firm’s loan book growth to £607m gross balances in FY21 (up 51% on the previous year). The group is optimistic this will hit £800m-£950m this year.

I’ll wait to see whether the company makes substantial revisions to its dividend forecast on results day before investing. Provided Admiral can demonstrate it’s able to navigate the inflationary climate successfully, I view the share price slump as an excellent dip-buying opportunity for me.

Land Securities Group

Land Securities Group (LSE: LAND) shares have fared better this year, falling 5.5%. Structured as a real estate investment trust (REIT) since 2007, it’s the UK’s largest commercial property development and investment company. The stock yields a healthy 5.29%.

At 31 March, this FTSE 100 property business owned a £12bn portfolio of retail, leisure, workspace and residential hubs spanning 24m square feet. It has a particularly high concentration in central London, with 56% of its portfolio located in the West End alone.

The latest financial results were largely positive. The company’s gross asset value increased 11% year-on-year and dividends per share rocketed 37%. Gross rental income was also slightly up, rising 3% to £586m.

It’s not all plain sailing for Landsec shares, however. The Q2 2022 RICS UK Commercial Property Survey results signalled “a more cautious tone…with a weakening outlook across the broader economy anticipated to weigh on the market going forward“. A sharp downturn in commercial real estate prices would be a headwind for the share price.

Nonetheless, the REIT has a high-quality portfolio and I’m bullish on its long-term investment prospects. With flagship properties to its name, such as the Brighton Marina and Bluewater in Kent, I like Landsec’s diversification as well as its strength in the capital. I’d buy this stock for additional real estate exposure in my portfolio and solid dividends.

I’ve been taking a look at the biggest FTSE 100 fallers so far in 2022. Are there any bargains on offer for investors ahead of a possible market recovery?

#1: Ocado collapse

Online grocer and warehouse specialist Ocado Group (LSE: OCDO) has fallen by more than 50% since the start of the year. It’s been a painful collapse, but with the company’s international business still growing, is there an opportunity here?

Ocado’s latest numbers don’t tell a great story. Revenue fell by 4.4% to £1,262m during the first half of this year and the group reported a pre-tax loss of £211m.

UK shoppers are scaling back their online ordering after the pandemic and maybe finding cheap places to shop.

However, it’s the international business that matters here. Ocado is selling its automated warehouse technology to retailers around the world. The company builds the warehouses for its customers and then collects a percentage of future sales.

This business is losing money at the moment. But Ocado’s management believe that future profits could total more than £750m over the “mid term”.

That could make Ocado shares look cheap — one day. Personally, I’m not comfortable with the long timeframe and the company’s continuing losses. I won’t be buying.

#2: Admiral could be a bargain

Shares in FTSE 100 insurer Admiral (LSE: ADM) have fallen by more than 40% so far this year.

A sharp rise in car repair costs is putting pressure on all motor insurers’ profits at the moment. Admiral’s profits are expected to fall by around 25% this year.

The main risk I can see is that competitive pricing in the insurance market will leave Admiral struggling for a while yet.

However, Admiral has a long track record of steady growth. It’s always been highly profitable and very well managed, in my view. I think this will probably still be true in the future.

The latest broker forecasts suggest that Admiral is trading on around 13 times forecast earnings at the moment, with a potential 7% dividend yield.

Although the short-term outlook is uncertain, I think Admiral shares probably offer good value as a long-term investment.

#3: JD Sports needs a new boss

Shares in sportswear retailer JD Sports Fashion (LSE: JD) are still worth 1,750% more than they were 10 years ago. But the company’s share price has fallen by more than 40% so far this year, despite record profits.

What’s knocked JD Sports down so low? The company has run into problems with UK regulators and decided to part ways with long-time boss Peter Cowgill.

JD is still hunting for a new chief executive. But what interests me is that management believes the group can match last year’s record profits this year, despite tougher economic conditions.

If this view is correct, then JD Sports shares could be trading on just 10 times forecast earnings today. That would be cheap, for a market-leading retailer.

I think there’s going to be extra uncertainty and risk until a new chief executive is appointed. But, in my view, this period of limbo might be an opportunity for long-term investors.

So is now the time for me to add Admiral shares to my dividend portfolio? Here, I’ll drill into the insurer’s dividend forecasts for the short-to-medium term and reveal whether I’d buy this income stock today.

Admiral’s payout history

Admiral has been a very profitable income stock in recent times.

It has a policy of paying a normal annual dividend equating to 65% of post-tax profit. It also seeks to distribute excess cash to shareholders — that is money not needed for investment or for regulatory reasons — by means of a regular special dividend payment.

Pleasingly for investors, Admiral’s ultra-defensive operations has given it the means to keep hiking dividends even during the height of the pandemic.

Spending on general insurance, and especially on motor insurance, which is a legal requirement, remains broadly stable during all points of the economic cycle. This explains why Admiral has continued to grow annual earnings in recent years.

In addition, a strong balance sheet has also allowed Admiral to keep growing the annual dividend recently. The business has remained financially robust too and its solvency ratio improved to 195% as of December 2021.

Mixed dividend forecasts

Its strong financial footing means City analysts believe Admiral will continue to raise the yearly dividend, to 165.8p per share. That’s even though earnings are expected to fall 28% year on year in 2022.

However, things begin to look a little less rosy for 2023. A full-year dividend cut to 130.9p per share is forecast. Yearly profits are tipped to slip 4% from this year, too.

Admiral’s dividend yield therefore slips to 7.1% for 2023.

The verdict

On balance then, should I buy Admiral shares for the dividend? Its defensive operations and cash-rich balance sheet makes it attractive. But the impact of soaring claims inflation is a worry to me.

It’s a problem that caused industry rival Direct Line to slash its profits forecasts last week. Then the business warned that “higher used car prices… higher third party claims costs, longer repair times and inflation in the cost of car parts” meant cost inflation was outpacing the rate at which premiums were rising.

This is worrying for Admiral’s dividend forecast. This year’s 165.8p estimated dividend is already higher than predicted earnings of 141.3p.

That being said, I’m still tempted to buy Admiral shares today. Even if 2022’s dividend fails to live up to that 9%-plus yield, there’s still a good chance the insurer will beat the broader FTSE 100 forward average of 3.8% by a mile. The same goes for next year, too.

Furthermore, as a long-term investor I view Admiral’s share price slump as a dip buying opportunity. Soaring inflation is a problem today. But in my opinion Admiral’s broad product offering, its excellent brand strength and global footprint should deliver solid profits growth in the years ahead. And this should result in many more lucrative dividends.

It’s all down to Sabre’s first-half trading update released on 14 June. In it, the company told us that “extraordinary inflationary pressures” have taken a big toll. And it’s changing its strategy to try to shore up profits. But does Admiral, which has a more diversified offering, deserve to suffer a big fall too? And are its shares an attractive buy now?

The Admiral share price is now down 46% over the past 12 months, after the latest fall, in a year that’s been tough on the whole insurance sector. It’s a particular bit of bad timing for investors whose buying had helped push the shares up a little in past weeks.

Admiral share price

Based on historic earnings, Admiral shares are now on a trailing price-to-earnings (P/E) ratio of around 8.9. I’d normally consider that a tempting valuation for such a high-profile general insurer. But the pressure will now be on this year’s earnings, and on that attractive dividend.

Admiral’s dividends have been nicely progressive in recent years, yielding 5.1% in 2021. The same level of cash paid in 2022 would yield 9%. it seems likely, then, that investors are not expecting a bumper dividend this year.

Results due next month

So what’s going to happen next? Admiral is due to release its first-half results on 10 August. And as of the time of writing, we’ve had no clues what they’re going to be like.

On the upside, I think Admiral should be more robust when it comes to a squeeze in the insurance market. For one thing, it offers a considerably wider range of insurance products. And they surely won’t all suffer from inflationary costs in quite the same way as motor insurance.

More diversified

In addition, the company is active in personal finance and legal advice. And it’s more globally diversified too, which should help take some of the pressure off.

Getting back to the dividend, Admiral has a record of strong cash generation. So there must be a half-decent chance that its annual payment will be maintained in 2022.

Relatively weak cover

But against that, cover by earnings last year was relatively modest. It came in at only 1.23 times, which doesn’t leave a lot of room for comfort. I’m not going to try to predict what will happen. But I wouldn’t be at all surprised to see a dividend cut this year.

If that happens, the Admiral share price could well dip further. And that might present a better buying opportunity. Right now though, I’m on the fence. I wouldn’t sell if I owned the shares. But I’m also not buying amid the current uncertainty.

Poor competitor results

The main reason for the fall in the share price is actually to do with a company in the same sector. Sabre Insurance Group is currently down almost 40% today, following the release of a trading update.

For the first half of the year, Sabre saw profit before tax fall from £22.2m a year ago to £4.3m in 2022. This is a large fall and clearly caught a lot of investors by surprise. Sabre put this down to the rise of claims inflation, and also cited other market-wide cost pressures. These include increases in industry levies and significant reinsurance costs at renewal period.

The main takeaway from this is that Sabre isn’t unique in this shock to the finances. Most of the points raised are industry-related, which is how we now turn to the fall in the Admiral share price.

Like Sabre, Admiral is another of the major UK insurance companies. Its half-year results are due out in just under a month’s time. Yet some investors are clearly concerned that Admiral will report disappointing results in the same way that Sabre did. So this negativity has spread across insurance stocks today.

Similar but still different

Admiral and Sabre are different in some ways. Sabre focuses on car and bike insurance. Admiral has a broader offering. Even though insurance is still the primary revenue driver, it also has divisions relating to personal finance, legal advice, and other spin-offs. Further, it has operations globally, with offices in India, Canada, and the US.

Therefore, although the dump today relates to the insurance market, I think the fall seems excessive. The diversified range of markets could mean that Admiral posts better results than Sabre next month. Further, Admiral may be better insulated from cost pressures due to internal measures taken. Whatever the reason, I don’t think it’s fair to be fearful and sell the stock today on the basis of results from another company.

Is the Admiral share price a bargain?

One reason why I like stocks in financial services is the dividends paid. Traditionally, stocks like Admiral had strong cash flow from the premiums they take in. This meant that dividends could be regularly paid out to investors like myself that were keen for income.

With the fall today, the dividend yield has jumped to 6.66%, excluding any special dividend payments. This makes it look very attractive to me.

However, regardless of the income, I’m clearly very cautious about investing before the results are released in a few weeks time. There’s a chance that it follows the same pattern as Sabre. Therefore, given the drop today, I’m going to wait and see how results go before deciding whether or not to invest.