Should I buy this FTSE 100 stock for my Stocks and Shares ISA?

FTSE 100 is one of the most followed indexes in the world. Royston Roche reviews a stock of this index to see if it’s a good buy for his portfolio.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Admiral Group (LSE: ADM) shares rose about 45% in the past year. The returns are exceptional as it outperformed the broader market index. The FTSE 100 index rose around 25% in the same period. 

The Covid-19 pandemic has changed the entire landscape of investing. Some of the index’s sectors might take many years to recover. However, I believe that the insurance sub-sector is less prone to such risks. More specifically, motor insurance has to be renewed every year. Here, I would like to focus on this FTSE 100 company.

Fundamental analysis

Admiral Group’s revenue growth has been good. It grew at a compounded annual growth rate of 8.3% from 2016 to 2020. In 2020, revenue grew by 2% year-over-year to £3.55bn. The growth rate is less when compared to the historical period. However, taking into consideration the drop in new vehicle sales last year, it’s still good.

I look for companies with good profit growth. Admiral’s profits before tax grew by 21% y-o-y to £638m. Another important metric, return on equity, was equally good at 52%. The company’s solvency ratio is strong at 187%, even though it is slightly lower than the previous year’s figure of 190%.

The company has been innovative and investing in new technologies. This can be seen in the increase in the number of customers. In 2020 it grew by 10% y-o-y to 7.66m. This shows that the company has a significant share in the UK market. 

Finally, a dividend yield of around 5.0% is the icing on the cake. The company paid a dividend of 156.5p for 2020. This is another reason why I like this FTSE 100 stock.

Risks to consider in this FTSE 100 stock

The insurance sector is very competitive. With the rising use of technology, customers can easily compare quotes. Admiral also has to face competition from new technology-driven insurance companies. For example, former Aviva chief Mark Wilson has started a new tech-led insurance company, Abacai. There could be a lot of similar companies eating into the company’s market share.

Insurance companies are also under criticism that consumers are overpaying premiums. The Financial Conduct Authority (FCA) has proposed new legislation that would prevent insurance firms from charging existing customers more than new customers. This could impact the company’s margins in the future. 

Last year, new car sales dropped due to Covid-19. If new car sales do not recover this year then it could negatively impact the company’s shares. This could be a long-term blow to the company’s earnings as it impacts renewals over a period of time. 

Looking into the future the management has warned that they expect a rise in claims this year as lockdown eases. The loss ratio, i.e. the amount it spends on claims compared to how much it earns on premium, will be higher than the previous year.

Final view  

The company’s financials are good. The motor insurance business has not been negatively affected much by the Covid-19 pandemic. However, I am bit worried about the expected drop in profits this year. I will keep this FTSE 100 stock on the watchlist and not buy just yet. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Roche 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.

More on Investing Articles

Google office headquarters
Investing Articles

1 reason I like buying S&P 500 shares – and 1 reason I don’t

Will this investor try to improve his potential returns by focusing more on S&P 500 shares instead of British ones?…

Read more »

Young woman holding up three fingers
Investing Articles

3 SIPP mistakes to avoid

Our writer explains a trio of potentially costly errors he tries to avoid making when investing his SIPP, on an…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

Here’s how (and why) I’d start buying shares with £25 a week

Our writer uses his investment experience and current approach to explain how he would start buying shares on a limited…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Here’s my 5-step approach to earning passive income of £500 a month

Christopher Ruane explains the handful of steps he uses to target hundreds of pounds in passive income each month.

Read more »

Investing Articles

2 UK shares I’ve been buying this week

From a value perspective, UK shares look attractive. But two in particular have been attracting Stephen Wright’s attention over the…

Read more »

Investing Articles

A lifelong second income for just £10 a week? Here’s how!

With a simple, structured approach to buying blue-chip dividend shares at attractive prices, our writer's building a second income for…

Read more »

Investing Articles

Here’s how I’d use a £20k Stocks and Shares ISA to help build generational wealth

Discover how our writer would aim to turn a £20k Stocks and Shares ISA into a sizeable nest egg by…

Read more »

Investing Articles

Billionaire Warren Buffett just bought shares of Domino’s Pizza. Should I grab a slice?

Our writer takes a look at a few reasons why Domino's Pizza stock might have appealed to Warren Buffett's Berkshire…

Read more »