In fact, I’d buy this insurance giant before full-year results come are released on Tuesday, March 16. Sabre Insurance earlier declared that “an attractive full-year dividend” could be coming down the pipe.
I feel that this FTSE 250 share’s operating model should lay the foundations for bulky dividends long after 2021 too. Its brands like Insure2Drive and Drive Smart are niche operations that offer insurance to drivers who struggle to get cover elsewhere. This translates into higher premiums that in turn create excellent profit margins and help produce lots of cash.
Car sales are slipping
Of course no UK stock is without its risks. And Sabre Insurance faces a couple of not-insignificant problems in the near term and beyond. New car sales in Britain are falling, putting pressure on the average premium sizes that insurers enjoy. The Society of Motor Manufacturers and Traders (SMMT) has said that new vehicle demand slumped 35% last month, the worst February result since 1959. The body cut its 2021 sales forecasts by 60,000 units too, to 1.83m.
Shuttered car showrooms and Covid-19 lockdowns have obviously fed through to those shocking SMMT numbers. Though it’s possible that new vehicle sales could continue to struggle as the year progresses. A lumpy economic recovery could cause individuals and companies to hold off spending on new sets of wheels. Ongoing uncertainty over vehicle emissions legislation in the UK might keep damaging new car volumes too.
A long-term worry for UK insurance shares like Sabre is the steady fall in the number of new drivers. Test pass rates in Britain fell to four-year lows in 2019/20, latest data shows. It reflects the growing cost of driving lessons and changes to testing. But it’s also been caused by the rising cost of motoring and growing environmental awareness.
A top UK dividend share
That said, I still think Sabre Insurance is an attractive pick at current prices.
City analysts expect annual earnings at the company to fall 3% in 2021 before rebounding 6% in 2022. As a consequence, Sabre trades on a forward price-to-earnings (P/E) ratio of 16 times. It’s a figure I think makes the UK share much more attractive than fellow car insurance giant Admiral. The latter trades on an earnings multiple that sits in the mid-20s for 2021.
As I suggested earlier, the prospect of big dividends is why I think Sabre Insurance looks like a great ISA buy. The company’s balance sheet is rock-solid and solvency coverage of 186% in September flew above its target range of 140% to 160%. Consequently, City brokers are tipping big dividends for both 2021 and 2022, which create chunky yields of 6% and 6.3% respectively.
Royston Wild has no position in any of the shares 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.