FTSE 100 incumbent Admiral Group (LSE: ADM) has seen its shares dip in the past couple of months. This drop-off piqued my interest recently, but I’ve always liked the stock.
With its share price falling, I reckon now is a great time to buy cheaper shares in a great stock. Here’s why I’m bullish.
Car insurance
Admiral is one of the largest car insurance firms in the UK. It specialises in car insurance for younger drivers. In fact, I recall one of my earliest policies (I won’t say how long ago) when I first started driving being with Admiral.
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Since early December, the shares have dropped from 2,801p to current levels of 2,502p, which is a 10% drop. However, over a 12-month period, they’re up 10% from 2,264p at this time last year.
So what’s happened? Well, the car insurance industry, like many others during the recent volatility, has come under scrutiny. This is linked to the Financial Conduct Authority (FCA) taking a closer look at consumers being charged premiums for paying the cost of their insurance in instalments. I reckon the market has reacted badly here, but I think it’s been a bit overcooked!
Bullish view
When a stock falls like Admiral has, I would usually exercise more caution than usual. However, I think it has just presented a great investment opportunity.
From a bullish view, Admiral possesses defensive traits as car insurance is a legal requirement for all drivers. This covers personal, business, or any other type of use. Plus, Admiral’s multitude of brands aimed at covering different types of drivers, and its wide reach, has helped it perform well in recent years, especially when I see profitability figures compared to competitors like Direct Line.
Next, Admiral’s use of telematics technology has helped set it apart from other firms in the industry. This type of technology can help understand risks, driving patterns, and anticipate issues. In turn, this has led to the underwriting arm of the business performing well, which is usually not the most profitable part of any car insurance company.
Finally, Admiral shares would boost my passive income with a dividend yield of 4.1%. This is higher than the FTSE 100 average of 3.9%. However, I’m conscious that dividends are never guaranteed.
Risks and verdict
From a bearish perspective, if a full blown FCA investigation were to occur, Admiral and its peers could come under financial pressure if any fines were to be issued, and investor sentiment could be hurt. Furthermore, inflationary pressure could mean repairs are more expensive than before. This could take a bite out of profits, in turn, hurting returns as well. I’ll keep an eye on updates on both fronts.
Overall I reckon Admiral’s defensive ability, brand power, use of technology, and the passive income opportunity make it a shrewd buy. I’d snap up some shares when I next have some investable cash.
