The insurance sector took a hammering as the pound slumped this week, and Admiral Group (LSE: ADM) was among the sufferers. The Admiral share price has picked up a few pennies on Thursday, but this week’s punishment leaves it down 40% over the past 12 months.
Looking again at Admiral’s interim results, posted in August, I see a common trend. First-half profits fell compared to the same period a year previously, but they’re higher than they were in 2019 before the pandemic.
Earnings per share dropped 50% from 2021, but still came in 10% ahead of the first half of 2019.
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The interim dividend is one thing that didn’t beat 2019, though. The 60p ordinary dividend per share was 5% below the 63p paid back then. And it’s a whopping 48% down from 2021’s first-half payment.
The dividend situation is complex, though, as we’re also looking at a combination of ordinary dividend plus specials. So it’s hard to gauge any longer-term trend right now.
Dividend yields
Forecasts suggest a full-year dividend yield of around 8.5%, which looks attractive. But analysts expect it to drop to under 7% in 2023 — and forecasts are already out of date and don’t account for the latest turmoil.
Anything above 5% still looks good to me, and I’d be happy to take that on a long-term basis. But the insurance business is under intense pressure right now. And I would not rule out the possibility of a serious cut being needed if we experience a prolonged recession.
I think we could even see rising insurance premiums over the next 12 months too, and that could easily scare investors away from the sector.
Positivity
Still, even considering that, I do see plenty of reasons for positivity. Admiral’s continuing special dividends represent a clear statement of confidence, in my view. If the company doesn’t think it needs to retain the cash to get through a couple of possibly tough years, maybe I’m worrying unduly.
Price-to-earnings (P/E) multiples don’t look especially tempting at the moment. A trailing P/E of 15 would drop only a little based on forecasts for the next two years. But then, that does represent earnings and the share price falling by a similar order of magnitude.
So if and when earnings recover and get back to growth, Admiral shares could be looking very cheap indeed.
Tough times
And though the sector is tough, I see defensive qualities in Admiral. It specialises in motor insurance, and that’s a compulsory requirement. Folks suffering under an inflationary squeeze can give up on holiday plans, and just cut their discretionary spending generally. But they can’t decide to go without insuring the car this year. Not legally, at least.
So do I rate Admiral as a buy right now? Yes, sort of. I’m just not a big fan of retail insurance shares like this. I’m more a follower of the Aviva and Legal & General aspects of the financial sector.
But despite the clear risks, I do see the Admiral share price fall as offering a long-term income opportunity for investors whose strategy covers that kind of business.
