I recently bought FTSE 100 insurance giant Admiral (LSE: ADM) for my passive income portfolio. This comprises stocks that deliver a high dividend yield with minimal effort from me – hence the ‘passive label’.
The aim of these holdings is to enable me to further reduce my working commitments as and when I wish.
Although these stocks have been selected primarily for their high dividends, they can also deliver price gains. This has certainly been the case with Admiral, which is now trading around an all-time high following its H1 2025 results.
Consensus analysts’ forecasts are that its dividend yield will continue to rise over the next three years. Additionally, valuation analysis shows that there is still enormous value left in the stock, despite its recent price rise.
And in my experience, assets tend to converge to their true value over time. This experience consists of several years as a senior investment bank trader and decades as a private investor.
The business
A risk to the firm remains the intense competition in its sector, which may squeeze its margins. That said, the H1 2025 numbers released on 14 August saw profit before tax up 69% year on year to a record £521m. This was despite average UK car insurance prices falling over the last 18 months, according to the firm.
It managed this by increasing its insurance revenue 18% through competitive pricing to £2.47bn. Revenue is the income made by a business, while profits are what remain after expenses are deducted.
Given this, earnings per share soared 72% to 132.5p, while return on equity rose 1.2% to a whopping 57%.
The strong results also allowed the firm to increase its interim dividend by 62% from last year to 115p. If such a rise were applied to Admiral’s total 2024 dividend, then it would pay 311.04p this year.
On the current £35.53 share price, this would give a yield of 8.8%.
Current passive income generation
However, using just the present 5.2% yield as an average would provide investors considering a £10,000 holding with £6,801 of dividends after 10 years.
This calculation is also based on the dividends being reinvested back into the stock – known as ‘dividend compounding’. It is a similar idea to leaving interest to accrue in a bank savings account.
On the same basis, the dividends would rise to £37,428 after 30 years.
Including the initial £10,000 investment, the total value of the Admiral holding would be £47,428. And this would pay £2,466 of passive dividend income every year by then!
What about potential price gains?
A discounted cash flow (DCF) valuation highlights where any firm’s share price should be, based on cash flow forecasts for the underlying business.
In Admiral’s case, the DCF shows the shares are 40% undervalued at their present £36.61 price. This is despite the recent price rise.
Therefore, the fair value of Admiral stock is £61.02.
Given this deep discount to fair value, and its high yield, I will buy more of the shares very soon.
