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Admiral shares slumped 5.5% yesterday. Here’s why I’d buy this dividend star now

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Yesterday, the worst performing stock in the FTSE 100 was Admiral (LSE:ADM). The share price fell 5.5% following a large sale by shareholder Munich Re. After trading comfortably above 3,000p earlier this week, Admiral shares closed the day at 2,879p. Although this is a short-term hit, I think it provides a good buying opportunity for investors like myself who don’t currently own  of the shares. Here’s why.

Why Admiral shares fell yesterday

The slump in Admiral stock came as a large shareholder sold 12.1m shares. Munich Re is a business with close ties to Admiral, and is a company that Admiral uses to underwrite some car insurance business, via subsidiaries. They’ve worked together for many years and Munich Re still owns 18m shares in the firm, even after the sale yesterday.

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There isn’t any clear reason for the share sale that I can see. Maybe the board felt that it was the right time to reduce exposure to Admiral, given the amount of business the two do with each other. 

After all, in its H1 results, Admiral announced that arrangements with Munich Re would be extended. Some business will be done on a co-insurance basis through to 2029. So with such a partnership, the decision might have been taken to sell some stock to reduce the risk.

Ultimately, Munich Re still has a large holding in the UK firm. I’d be much more concerned if it had sold its entire stake in the business. As it stands, I don’t see anything worrying about the share sale.

Why I’d buy now

Admiral shares have been appealing to me in recent months. In fact, I wrote a piece last week singing its praises. For example, I think that the company could do well if we see advice from the Government to work from home during the winter. Higher infection rates seen recently wouldn’t make this idea that unlikely. With lower car usage, lower claims could see Admiral boost profitability. This was seen during periods of 2020.

Another reason I like Admiral shares is for the dividend. Thanks to the share price dip, the dividend yield currently sits at 5.26%. This is almost 2% higher than the FTSE 100 average yield. In fact, over the past decade, the lowest the dividend yield has been is 2.5%. From my point of view, this is a sustainable dividend that is likely to be continued to be paid well into the future.

One risk is that Admiral shares could be considered overvalued. The P/E ratio sits just below 14. Although this isn’t overly rich when looking at the whole market, it could be seen as expensive for the industry. For example, Aviva currently has a P/E ratio of 5.5, with a similar dividend yield.

Overall, I’d still favour buying Admiral shares now thanks to this latest dip and am considering doing so.

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jonathansmith1 has no position in any share mentioned. The Motley Fool UK has recommended Admiral Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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