Insurer has paid dividends of £14 a share over past decade – not bad for a stock that trades at £24

Questor stock picks: Rising profits suggests it may also have pulled through worst of cost inflation cycle

Russ Mould 23 August 2023 • 6:00am

Last week’s first-half results may not look promising at first glance, but Admiral may finally be about to encounter some smoother waters after a distinctly choppy period and build on a promising run since we covered the stock in April.

Investors might therefore like to take a closer look at the non-life insurer, even if this column’s recent foray into life insurance with Legal & General and Just Group, on which we published an update on Monday, has yet to bring much by way of reward, not least because Admiral is well capitalised, growing its customer base and raising prices to compensate for input cost inflation, while the shares offer a decent yield.

An increase in profits that lagged the increase in revenues, a cut in the dividend and a drop in the number of UK motor insurance customers all mean the interim results do not immediately catch the eye, but they are far from a car crash for the company, which is best known for its Admiral, Elephant and Diamond brands and car, travel and pet insurance businesses.

That slight drop in UK car insurance customers to 4.76 million from 4.94 million at the end of 2023 is making headlines, especially as it means this operation cannot point to any growth at all in its customer base since the end of 2020.

However, total customer numbers have surged to 9.41 million from 7.66 million since the end of 2020 and Admiral has almost as many customers in non-UK motor related areas – 4.65 million – as it does in UK car insurance.

The UK household and European motor operations are starting to show a profit, as if to support our thesis, outlined here in the spring, that the FTSE 100 company is building a good base for a potential rise in profits over the long term after 2022’s speed bump when an increase in the number of accidents, rotten weather and higher repair costs increased total net insurance claims and took a chunk out of earnings.

Growth in premiums written and net revenues outstripped profits growth again in the first half of 2023, but at least pre-tax income did rise, to suggest that Admiral may have pulled through the worst of the cost inflation cycle.

Analysts seem to think so, because they expect a modest increase in group pre-tax profits in 2023 and a double-digit percentage increase in 2024.

If those forecasts are met (or exceeded) it will help further buttress Admiral’s solvency ratio, which, at 182pc, means it has more than enough capital to meet all of its obligations, even in the event of an extreme shock.

This suggests Admiral is well capitalised, although management is sensibly taking few chances, as evidenced by the board’s decision to cut the interim dividend to 51p a share from 60p a year ago (and the absence of any special dividends).

Analysts are still looking for a final payment for 2023 of 60p to take the total to 111p, enough for a yield of 4.6pc.

Those figures supplement ordinary and special dividends worth £14.09 a share in total over the past decade.

That is an eye-catching figure when the current share price is about £24 and even if the past is no guarantee for the future it is one that suggests Admiral is capable of producing valuable income to supplement any capital appreciation.

Questor says: hold

Ticker: ADM

Share price at close: £23.86

Update: Crest Nicholson

So much for that theory. Our attempts last week to draw comfort from how shares in Bellway were holding up after a weak full-year trading update have been rather undermined by Monday’s profits warning from Crest Nicholson, which drilled a fresh hole in its own share price and that of its housebuilding rivals.

All of our profits in Crest Nicholson since our coverage of the stock in 2020 are long gone, although cumulative dividend payments of 30.6p a share, with 5.5p more to come on Oct 13, make up for the paper loss.

Management is targeting an unchanged full-year payment of 17p for the year to October 2023, equivalent to a dividend yield of 10pc.

That suggest the market may already be pricing in a cut for the next fiscal year.

Add a price-to-book ratio of 0.5 and a lot of bad news is already factored into the stock. That may (eventually) protect us against losses, which is a start, although we admit that a positive catalyst to generate any near-term rise in the share price is harder to find.

We shall just have to tough it out.

Questor says: hold

Ticker: CRST

Share price at close: 172.5p

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