Why Admiral Group plc Could Be Forced To Cut Its Dividend

Industry pressures will hurt Admiral Group (LON: ADM), Esure Group (LON: ESUR) and Direct Line Insurance Group (LON: DLG).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Admiral (LSE: ADM) has one of the most attractive dividend payouts. The company supports a trailing dividend yield of 7.2% and the consensus among City analysts is that this payout will continue for the next few year. City forecasts have pencilled in a dividend yield of 7.5% for 2014 and 7.1% for 2015. 

However, some analysts have begun to call into question the sustainability of this payout, as Admiral has recently tapped the market for extra cash to boost its capital position.

Price pressuresadmiral.2

According to survey data, the average UK car insurance premium is falling. Thanks to the rise of price comparison sites, competition is becoming aggressive with each insurer trying to undercut each other. And it’s not just Admiral that is being affected, the company’s peers, Esure (LSE: ESUR) and Direct Line (LSE: DLG) are also feeling the pressure. 

Unfortunately, as premiums fall, claims costs are rising and profits are evaporating, car insurance has never been a profitable business. 

Indeed, last year was the first year that the industry as a whole made an underwriting profit since 1994. That being said, Esure, Admiral and Direct Line have managed to grow profits by keeping costs under control, although claims costs continue to rise. 

direct lineReserve release 

To boost profits this year, Admiral tapped its reserves, releasing funds to bulk up income from operations. In other words, management tapped funds built up during previous years. As you can guess this is not a sustainable, long-term strategy, one day the reserves will run out. 

Admiral has already attracted criticism for using the reserve release strategy.

For example, during the first half of this year the company’s revenue fell 5%, despite gaining 340,000 more customers. What’s more, the insurer released £73m from reserves to help keep half-year pre-tax profits little changed at £183m.

While these figures are concerning, what really shocked analysts was the fact that the company then decided to tap the market for £200m in bonds, to boost its capital position. Some analysts have interpreted the bond issue as a sign that the insurer cannot afford the hefty dividend payout. 

Peer pressure

If Admiral’s dividend payout is for the chop, then the payouts of Esure and Direct Line are likely to be facing the same fate.

Admiral is one of the UK’s most efficient insurers and more profitable than most, with an expense ratio equal to 20% of premiums. Direct Line’s cost ratio is closer to 30%, however, analysts estimate that the company could cut up to £1bn per annum of the group’s cost base. 

Still, at present levels Direct Line is expected to offer investors a dividend yield of 6.5% this year, followed by 6.3% during 2015. Esure is expected to support a yield of 6.6% this year followed by 7% during 2015. For the time being these payouts look safe but it always pays to build a well-diversified portfolio of reliable dividend paying stocks allowing you to reduce risk and sleep soundly at night.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »