ii view: why Admiral shares just spiked to record high

Reduced motoring claims under the pandemic and more special dividends to come. Buy, sell or hold?

First-half trading update to 30 June

• Expects pre-tax profit of between £450 to £500 million
• Interim dividend expected to be between 110p to 125p per share

ii round-up:

Insurer Admiral Group (LSE:ADM) flagged expectation for higher-than-anticipated profits for the six months to June, given both reduced motoring claims under pandemic lockdowns and the lower cost of UK motor injury claims over recent years.

The Cardiff headquartered insurer now expects first-half pre-tax profit of between £450 million and £500 million from continuing operations. That’s up from the £287 million pre-tax profit reported in the first half of last year. 

Admiral shares briefly rose by 6% at the start of UK trading, hitting a new high above 3,300p. However, they have since calmed down and currently trade up 3%, giving a year-to-date gain of over 10%. Shares for rival motor and home insurer Direct Line (LSE:DLG) are down by 7% over the same time. 

Given the better than expected first-half profit and strong solvency or financial position, an interim dividend of between 110p and 125p per share is expected to be declared. 

Proceeds of £400 million from its recent £460 million Penguin Portals comparison business sale are also expected to be returned to shareholders over 2021 and 2022 via special dividends. Further detail will be provided with half-year results on 11 August.

However, accompanying management comments proved less favourable, highlighting its expectation for the level of reserve releases and profit commission during the first half to not be repeated over the second half.

ii view:

Founded in the early 1990s, Admiral now employs over 10,000 staff and is today the biggest general insurer by stock market value in the UK. Co-founder David Stevens recently stepped down as chief executive to be replaced by Milena Mondini de Focatiis, the former head of its UK and European insurance operations.

Admiral products range from UK motor and home insurance to comparison website fees and personal loans. Its motor insurance is sold across the UK, the US, Italy, France and Spain. Company brands include Admiral, Elephant, Diamond, Bell and Confused.com, as well as Gladiator for commercial vehicles.

For investors, an estimated forward price/earnings (P/E) ratio above both the three- and 10-year averages suggests the shares are not obviously cheap. The departure of the co-founder as CEO also carries some risk. But Admiral’s diversity and solid track record offer firm reassurance. Ongoing special dividends and a historic dividend yield, including previous special dividends, of over 4.5% also remains highly attractive in an era of ultra-low interest rates. In all, the shares appear likely to receive further support from long-term investors.  

Positives: 

• Diversity of both product and geographical location
• Attractive dividend yield (not guaranteed)

Negatives:

• Its personal loans business has generated losses
• Events outside of management’s control like the weather can impact

The average rating of stock market analysts:

Weak hold