Interactive Investor

Admiral versus Direct Line: whose shares are best?

9th February 2022 15:19

Graeme Evans from interactive investor

Both companies publish results next month, and there are already encouraging signs on trading. After running the numbers, this team of City analysts name their favourite motor insurer. 

A motor insurance comparison today said high-yielding shares in Direct Line (LSE:DLG) looked to be better value at a time when industry pricing is showing tentative signs of recovery.

Deutsche Bank named Direct Line as its favoured choice over rival Admiral (LSE:ADM), whose shares it regards as relatively expensive on 19 times 2023 earnings.

The bank's analysts have compared the two ahead of next month's results, when the focus will be on whether the industry has raised prices sufficiently to offset claims inflation.

Early suggestions from industry data point to a recovery in real terms, which Deutsche Bank believes will enable the pair to grow market share after pricing discipline the previous year.

Earnings should benefit at both companies, but today's note sees a more immediate impact for Direct Line while Admiral has greater exposure over the long-term.

The bank said: “We prefer Direct Line both on valuation grounds and the medium-term potential to re-engineer its balance-sheet, which could then begin to narrow its eight-point price/earnings discount vs. Admiral.”

Direct Line shares today rose 4.5p to 311.4p, with Deutsche Bank continuing to have a price target of 340p. Admiral shares today jumped 90p to 3045p, a rise of more than 3% after HSBC swung behind the stock with a new price target of 3,330p.

Admiral has delivered a trademark performance since October, justifying its continued inclusion in interactive investor's Consistent Winter Portfolio following 10 years of seasonal growth.

The stock, which appears on our list alongside Liontrust Asset Management (LSE:LIO), Safestore Holdings (LSE:SAFE), XP Power (LSE:XPP) and Halma (LSE:HLMA), is up 6% since the end of October but could end up 16% higher based on HSBC's target price.

Admiral reports full-year results on 3 March, when profits are set to rise 28% to £814 million and one-off special awards are expected to lift the total dividend to 119.9p.

Direct Line follows on 8 March, with Deutsche Bank looking for a 2.7% increase in the final dividend to 15.1p a share. The insurer trades with a dividend yield above 7%, rising to 9% based on the bank's 2023 estimates.

The company's dividend makes it one of two new entries in our closely-followed annual list of 10 shares for a £10,000 annual income. The other insurer in the line-up is Legal & General (LSE:LGEN).

While there are encouraging signs on trading, interest in Direct Line and Admiral shares comes with a degree of caution due to the Financial Conduct Authority's (FCA) ongoing review of general insurance pricing.

Deutsche Bank's note adds: “Further confusion comes from whiplash reforms, elevated inflation, supply-chain issues and Covid-related frequency effects.

“Nonetheless, any real market pricing recovery should provide the means for both Direct Line and Admiral to lift volumes, while holding motor margins steady at pre-Covid underlying levels.”

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