Will shares in Admiral Group help you build a FTSE-beating retirement fund?
The last five years have been tough for those in retirement. Portfolio valuations have been hammered and annuity rates have plunged. There's no sign of things improving anytime soon, either, as the eurozone and the UK economy look set to muddle through at best for some years to come.
A great way of protecting yourself from the downturn, however, is by building your retirement fund with shares of large, well-run companies that should grow their earnings steadily over the coming decades. Over time, such investments ought to result in rising dividends and inflation-beating capital growth.
In this series, I'm tracking down the UK large-caps that have the potential to beat the FTSE 100 (UKX) over the long term and support a lower-risk income-generating retirement fund (you can see the companies I've covered so far on this page).
Today, I'm going to take a look at Admiral Group (LSE: ADM), the motor insurance company that operates Confused.com.
A short story
Let's take a look at how Admiral has performed against the FTSE 100 over the last 5 years -- 10 year figures aren't yet available, as Admiral only floated in 2004:
|Total Returns||2007||2008||2009||2010||2011||5 yr trailing avg|
(Total return includes both changes to the share price and reinvested dividends. These two ingredients combined are what make it possible for equity portfolios to regularly outperform cash and bonds over the long term.)
Admiral's returns so far have been pretty impressive, but will it be able to sustain these over the long term as a part of a retirement fund portfolio?
What's the score?
To help me pinpoint suitable investments, I like to score companies on key financial metrics that highlight the characteristics I look for in a retirement share. Let's see how Admiral shapes up:
|Net debt (cash)||(£224m)|
|5 year average financials|
Source: Morningstar, Digital Look, Admiral Group
Here's how I've scored Admiral on each of these criteria:
|Longevity||It's still a teenager.||2/5|
|Performance vs. FTSE||Pretty good so far.||3/5|
|Financial strength||Net cash and above-average profitability.||4/5|
|EPS growth||Has delivered decent growth in recent years.||4/5|
|Dividend growth||A strong record with a consistent payout policy.||4/5|
Admiral has impressed investors since its flotation, thanks to its generous dividend policy and above-average profitability. It pays out 45% of post-tax earnings and this year has declared a special dividend that has taken the forward dividend yield up to a desirable 7.5%. Yet its success may not be as sustainable as it first seemed. Three quarters of Admiral's policies are reinsured, which means that Admiral buys insurance from other companies to cover claims on those policies. The advantage of this is that its costs are fixed and known in advance, but the disadvantage is that like any convenient, de-risking service, it comes at a price, which consumes a lot of Admiral's earnings.
There are signs that motor insurance premiums are beginning to fall and the recent ban on personal injury claim referral fees will also hit the company, as could the ongoing Competition Commission investigation into Britain's motor insurance industry. This investigation was triggered when an Office of Fair Trading investigation concluded that insurers were using inflated repair costs and hire car charges to milk consumers to the tune of £225m per year -- money that could potentially be subtracted from our premiums in years to come.
Overall, I think that Admiral's track record is a bit too short for me to choose it for a retirement portfolio. Despite its respectable score of 17/25, I'd prefer one of the two big general insurers, Aviva (LSE: AV) or RSA Insurance Group (LSE: RSA), both of which offer have much longer track records and currently offer yields in excess of 7.5%, without recourse to special dividends.
Top income picks
Doing your own research is important, but another good way of identifying great dividend-paying shares is to study the choices of successful professional investors.
One of the most successful income investors currently working in the City is fund manager Neil Woodford, who manages more money for private investors than any other City manager. Neil Woodford's dividend stock picks outperformed the wider index by a staggering 305% in the 15 years to 31 December 2011.
The good news is that you can learn about Neil Woodford's top holdings and how he generates such fantastic profits in this free Motley Fool report. Many of Mr Woodford's choices look like excellent retirement shares to me and the report explains how he chose some of his biggest holdings.
This report is completely free and I strongly recommend you download "8 Shares Held By Britain's Super Investor" today, as it is available for a limited time only.
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Further investment opportunities:
> Roland owns shares in Aviva but does not own shares in any of the other companies mentioned in this article.