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The FTSE 100’s Hottest Dividend Picks: Admiral Group plc

Today I am explaining why Admiral Group (LSE: ADM) is an excellent stock for dividend hunters.

Monster yields on the cards

A backcloth of meaty, double-digit earnings growth has enabled insurance leviathan Admiral to lift the dividend at a similarly impressive rate. Indeed, the full-year payout has advanced at a heady compound annual growth rate of 14.7% since 2009, making it a firm favourite with income seekers.

Admiral is expected to experience earnings pressure in the medium term as competitive pressures bite, however — dips to the tune of 2% and admiral.23% are pencilled in for 2014 and 2015 correspondingly, based on City forecasts. And this scenario is anticipated to stem the run of dividend increases during the next 24 months.

Broker consensus currently points to a modest full-year increase this year, to 99.6p per share versus 99.5p in 2013. And the aforementioned earnings weakness is expected to result in a 5% cut in 2015 to 94.7p.

Despite expectations of a spluttering payout policy in the next two years, however, predicted payments for 2014 and 2015 still carry enormous yields of 6.7% and 6.4% respectively. To provide some context, the FTSE 100 currently carries a forward average of just 3.2%, while the complete non-life insurance sector boasts a corresponding readout of 4.8%.

Debt issuance boosts dividend outlook

At face value, investors may point to scant dividend cover for the next two years as a possible spanner in the works for predicted payouts. Indeed, earnings barely cover dividends through to the end of 2015, with cover of 1 times falling well short of the safety benchmark of 2 times or above.

Still, I believe that investors should be encouraged by Admiral’s £200m, 10-year debt issuance announced this month. Not only does the move buffer the firm against Solvency II capital rules, but should also facilitate growth and allow the business to continue offering attractive dividends.

And in a mostly-bubbly trading update this month, Admiral announced that insurance rates have been broadly flat during January-June, indicating that pricing conditions have improved in recent months from the first quarter of the year. Meanwhile, improved retention levels pushed the number of covered vehicles 3% higher to 3.1 million during the period.

With the company also pulling up trees in foreign markets — group coverage rose 20% to 600,000 vehicles in the first half of 2014 — assisted by the success of its US comparison website comparenow.com, I believe that the firm should remain an attractive dividend selection for some time to come.

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Royston Wild has no position in any shares mentioned. The Motley Fool has no position in any of the shares mentioned.