Is Admiral Group plc A Better Buy Than Aviva plc?

Based on its results over the past five years, Admiral (LSE: ADM) is one of London’s best insurance companies. The group is cash-generative, achieves a high return on equity and looks after its shareholders. The same can’t be said for Aviva (LSE: AV), which has made numerous mistakes over the past five years.

However, if the City top analysts are to believed, this will change over the next three years now that Aviva has completed its deal to buy Friends Life.

A good deal

Up until last week, the City was broadly negative on the Friends-Aviva deal. But now that the deal has been completed, some analysts have started to issue positive research reports on the deal. 

For example, analysts now believe that the Friends deal has completely transformed Aviva’s balance sheet, strengthening Aviva’s financial position. These forecasts are based on the fact that Friends is a highly cash-generative company, with an overcapitalised balance sheet and little gearing. 

Will take time

It will take a year or two for Aviva and Friends to fully integrate operations following their merger. So, for the next two years investors are unlikely to see any benefits from the deal.

However, by 2017 City analysts believe that the integration process will be mostly complete. With this in mind, analysts forecast that Aviva is trading at a 2017 P/E of 9.4, and the company will offer a dividend yield of 5.3% during 2017 — up from the current yield of 3.2%. Further, if Aviva decides to up its payout ratio to 100%, the company’s dividend yield could hit 7.3% by 2017. This figure is based on current cash-generation forecasts. 

Nevertheless, as mentioned above these benefits won’t flow through until 2017, which makes Admiral look like the better bet in the short term. 

Short-term play

Analysts believe that Admiral’s shares will support a dividend yield of 5.5% this year, followed by 6% during 2016. However, I’m concerned about the sustainability of this payout.

You see, as the second largest insurer of private cars in the UK, Admiral’s fortunes are driven by the UK motor insurance cycle. Moreover, increasing competition and falling motor insurance premiums are starting to affect to affect Admiral’s profits. There’s no telling if the company will be able to reverse this trend.

 The company’s pre-tax profit fell by 4% during 2014 and for the first time since the group became a public company, Admiral failed to post record results. 

Foolish summary

Overall, Aviva looks to be a better long-term play than Admiral. Aviva’s deal to acquire Friends Life will drastically strengthen the company and improve its cash generation.

On the other hand, Admiral already offers a market-beating dividend yield but an increasing level of competition in the UK motor insurance industry is starting to eat away at the company’s profits.

Still, if you already hold Admiral as an income play and you're looking for other top dividend-paying stocks, then why not check out The Motley Fool's new income report double pack.

For a limited time only we've bundled together our top income report, "How To Create Dividends For Life", with a new report entitled, "My 5 Golden Rules for Building a Dividend Portfolio".

Together, the two reports teach you everything you need to know to build a buy and forget dividend portfolio.

Just click here to download the free report double pack today!

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.