Should I Buy Admiral Group Plc?

I’m on the lookout for great share ideas. Should I set a course for Admiral Group (LSE: ADM)?

Unchartered waters

Last time I looked at Admiral Group in October, it had grown a blazing 35% over the year, making it one of the best-performing stocks on the FTSE 100. But its long-term performance is less impressive, down 15% over the past three years, against a rise in the FTSE 100 of more than 20% in that time. The share price has just dropped nearly 9% since hitting a 12-month high of £14.11 at the end of last month, and currently trades at £12.79. Is now a good time to buy it?

We won’t know how Admiral has fared this year until it publishes its six-monthly results on 29 August. In April, the group posted a disappointing 9% year-on-year fall in premiums from the UK car insurance market to £470m. Management doesn’t think it can reverse that quickly, and is therefore steering towards sunnier shores. In contrast to the UK, Admiral’s international car insurance turnover increased 20% to £48m. Unfortunately, that is barely one-tenth of UK turnover, so there is a long way to go to compensate for struggles at home. Group turnover was down 6% overall to £551m, although management said expectations were positive and unchanged in 2013.

Those were hardly inspiring figures, even if Admiral has zero debt and a strong balance sheet. Admiral owns price-comparison site, and although that market is beginning to look saturated, it has recently launched a new car insurance comparison service in the US,

Admiral admired

Admiral does have its admirers. Bank of America recently singled out its stable consensus earnings estimates and multiple expansion, preferring it to sector rivals RSA Insurance Group and Direct Line Insurance Group. It admitted growth opportunities were low, with motor prices likely to decline, and home and commercial margins remaining stable, but said the core attraction was the dividend yield. It set a target price of £14.

Admiral has also delivered steady earnings growth for the last five years, and is trading on a forecast total dividend of 6.9%, although roughly half of that will be paid as a special dividend (happily, the group hasn’t missed a single special dividend since listing in 2004). At last — I’m starting to take interest. Especially after Bank of England governor Mark Carney’s inflation report, which should stall base rates at 0.5% until 2016 at the earliest. How can people grumble that they can’t earn interest on their savings when a solid, debt-free operation like Admiral will pay them nearly 7% a year?

Full steam ahead

So there is a case to be made for investing in Admiral, namely its strong balance sheet, foreign expansion plans, fledgling US comparison site and, of course, that dividend — one of the highest on the FTSE 100. Forecast earnings per share of 4% this year and 5% in 2014 is good but not great. It isn’t that cheap, at 13.3 times earnings. But if you’re after income, the recent dip could be a good opportunity to give your portfolio the ballast of an income at nearly 14 times base rate.

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> Harvey doesn’t own shares in any company mentioned in this article