Insurance may not sound the most exciting or glamorous sector in the stock market, but it has actually experienced some quite dramatic structural change recently.
From a world of insurance brokers we had a transition to insurance sold directly over the phone — at this stage Direct Line (LSE: DLG) was the market leader.
Then we had the transition to price-comparison sites, led by Admiral Group (LSE: ADM),with brands such as Confused.com, where customers would check prices over the internet.
These companies each represent different niches in the insurance landscape. But which should you buy into?
Direct Line
Let’s take Direct Line first. This company sells premium, value-added insurance which is not available on price comparison sites. It is still, by some margin, the leading insurance provider in the UK, with some of Britain’s most well-known insurance brands.
Despite the fact that this business has no stake in the price comparison market, after bottoming in 2012, profits are growing. Here is the 5 year EPS progression:
2011: 16.6p, 2012: 12.3p, 2013: 20.8p, 2014: 23.1p, 2015: 24.3p
The 2014 P/E ratio is 10, falling to 9.5 in 2015. The dividend yield is 5.7%. To me, this looks cheap. Despite the emergence of a range of internet-based insurance brands in the UK, Direct Line still has a strong position in the UK market.
Admiral
In contrast, Admiral runs price-comparison sites such as Confused.com in the UK, LeLynx and Rastreator in mainland Europe, and the recently launched Comparenow in the States. It also sells price competitive insurance brands such as Admiral and Elephant.co.uk.
Admiral has blossomed over the past decade, and after taking a tumble in 2011, its share price is on a clear upward trend. After ten years of growth, earnings are still rising. The 2014 P/E ratio is 13.4, falling to 12.7 in 2015. The dividend yield is 7.2%.
Although the UK’s price comparison market is now maturing and is also highly competitive, there is substantial scope to grow in markets such as mainland Europe and the States. Because of this, I expect Admiral to steadily grow over the next decade as well.
Foolish summary
Overall, I would say both companies are buys. What makes both companies so attractive is that they are growing earnings, plus they provide a juicy, and growing, dividend yield. This means they would both be worthy additions to your high-yield portfolio. Which would I buy? I think, of these companies, I would buy Admiral, as it has the better long-term growth prospects, particularly internationally, plus it has a dividend yield that is high and growing.
