Covid-19 has impacted many FTSE 100 stocks, and the car insurance company Admiral Group (LSE:ADM) is no exception. With most people stuck at home during lockdowns, the number of cars on the road fell significantly. As a result, the level of insurance claims made fell to an all-time low as well. While this may seem like good news for the business, it also enabled competitors to lower their prices in an attempt to undercut and steal market share.
The reduced performance ultimately led to the FTSE 100 stock cancelling its dividends in early 2020. But despite the increased pricing pressure, total customer numbers grew by 6% in 2020. And dividends have been reinstated. So, is Admiral a dividend stock I should buy for my income portfolio? Let’s take a look.
A leader in UK car insurance
Admiral Group is a worldwide provider of insurance services. It offers home, travel, and motor insurance, with most of its customers buying the latter. In fact, the motor insurance option is so popular that it has become one of the UK’s largest car insurance companies.
Over the years, the company has built a portfolio of over 30 brands as well as starting its own financing services and law firm to provide legal protection for customers during claims. Combined, Admiral is now serving more than 7.1 million customers, most of them based in the UK.
What’s even more encouraging is the findings of a survey taken in early 2020 by Admiral. It revealed that 94% of its customers who made a claim last year would renew their policy. To me, this is an indicator that Admiral is providing high-quality customer service that may enable it to retain customers even if it can’t provide the cheapest possible price.
The FTSE 100 dividend stock has its risks
Operating an insurance company can be a risky business. Especially when it comes to motor insurance, which can have exceptionally-high-cost bodily injury claims. In some cases, the premium paid by customers may not cover the expenses incurred by them. In such cases, the firm has to pay out of its own pocket to cover the fees.
To offset this risk, Admiral, like many other insurance companies, uses its enormous cash flows from monthly premiums to fund long- and short-term investments in the bond and stock markets. Then it uses the investment returns to cover the excess costs of claim expenses.
But this subsequently exposes the firm to market risk. There are significant regulatory restrictions in place to prevent insurance companies from making risky investments. But any volatility in the market is bad news for the firm and could jeopardise the shareholder dividend. The market crash in 2020 is proof of that.
Should I buy the dividend stock?
When looking to invest in dividend stocks, a consistent track record is something I like to see. And in my opinion, Admiral has just that.
More cars are getting back on the road. And the business appears to be providing high-quality customer service that will help to improve its renewal rates. Therefore, Admiral looks like it could be a good addition to my dividend portfolio. Especially since analyst forecasts indicate, the dividend yield will rise to 6% in 2021.
