Right now, Aviva (LSE:AV) shares come with an eye-catching 7.5% dividend yield. But there’s another FTSE 100 insurance stock that I’d rather buy right now.
Insurers
Despite both being in the insurance business, Aviva and Admiral (LSE:ADM) differ significantly. The former is the UK’s largest life insurer, whereas the latter focuses on car insurance.
This is one reason I prefer Admiral. I think the car insurance industry – where policies renew annually – is an easier one to make money in than in life insurance.
The trouble with life insurance is that a policy can last for decades. So it’s typically a long time until a company finds out for sure whether a policy is going to turn out to be profitable.
This isn’t to say that car insurance is an easy business – underwriting margins are often tight. But I think the relatively short nature of its contracts makes for considerably more flexibility.
Competitive advantage
Insurance policies are often something of a commodity, so it can be difficult for a business to stand out. But I think Admiral has a more obvious advantage over its rivals than Aviva.
Admiral has been an early adopters of telematics – boxes that drivers install in their cars to provide data about their driving. This gives the company a better understanding of specific risks.
Evidence of the success of this comes from the firm’s relative success compared to its rivals. Over the last decade, it has consistently managed underwriting returns in excess of its competitors.
Aviva, for example, managed a 5% profit margin on its insurance underwriting during the first half of 2023. Admiral, by contrast, achieved just over 10%.
To my mind, this is a sign that Admiral’s tech gives it a clear edge over the competition. And I think this is an advantage that will prove durable for some time.
Dividends
It’s difficult to ignore the 7.5% dividend yield that Aviva shares come with. Especially compared to the 3% yield offered by Admiral shares at today’s prices.
Compounding returns at a 7.5% rate rather than a 3% rate can yield to significant gains over time. But there’s something else investors ought to be aware of and that’s the increasing share count.
Since 2013, Aviva has increased its outstanding shares by 38%. Admiral has also increased its share count, but only by 10%, and this is important from a growth perspective.
Suppose I owned 1% of Aviva’s outstanding shares and reinvested my 7.5% dividend each year. With the share count rising, my stake in the business would have increased to 1.3% after a decade.
If I owned 1% of Admiral’s shares and reinvested my 3% dividend each year, the increase in share count means I’d own 1.2% of the company after 10 years. That’s not much less than with Aviva.
Investing in insurers
The 7.5% dividend yield Aviva shares come with is eye-catching for investors and it might be a good idea for a passive income investor. But the rising share price concerns me.
By contrast, I think Admiral is a company with a strong competitive advantage in a more attractive part of the market. That’s why it’s the insurance stock I’d look to buy at today’s prices.
