Admiral Group - in a half Nelson?

Admiral Group: It is so tricky to judge whether this is a mis-understood money machine or a company facing burdensome structural challenges. As well as their core Admiral brand they operate several others including the comparison site ‘confused.com’. It has always been known that the group makes lots of money from ancilliary services and has, broadly, benefitted from the trend towards a claims and compensation culture. At the same time there are aspersions about just how likely you are on confused.com to end up being steered towards an Admiral Group product. Added to this, recent years has seen politicians starting to investigate whether the motor insurance industry is acting in consumers’ best interests and motor insurance rates have been under pressure. So Admiral’s eps seem to be plateauing just above 100p according to analyst forecasts (which probably have a decent margin of error). The dividend policy is to pay out 45% of post tax profits plus specials, having regard to reserve strength. At the moment this process is resulting in a near 100% payout ratio. The regular element is likely to prove cyclical given the nature of the industry with political and regulatory headwinds a further pressure. The special element is largely predicated on reserve releases, but they will in all probability come to an end at some point (maybe not that far away either). Then the dividend would look very exposed in respect of both elements. For now the shares at around 1285p with a 99.5p total dividend yield 7.7%. If you chose to put a line through the special dividend stream then the yield is a less alluring (and not necessarily rock solid) 3.5%-4%. So I do not see that Admiral fits the dividend growth mandate and would be wary of owning the stock. (7th October 2014)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about.

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