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Smart Investor: is Admiral seaworthy?

Smart Investor has a weakness for insurers. Will Admiral win the hallowed thumbs-up from our picky value investor?

 

Performance

Focusing on performance, Admiral’s net profit has grown at an annualised rate of 13.3% over the past five years, increasing from £103.7 million in 2006 to £193.6 million in 2010.

This is extremely impressive, especially when you consider that many FTSE 100 firms struggled during the credit crunch.

Return on equity (ROE) has also been mightily impressive over the past five years, averaging 55.6% and hitting 59.5% last year. Very few companies on the FTSE 100 (if any) have achieved this level of performance over the past five years.

No borrowing, and attractive dividends

In addition, Admiral has managed to achieve the above without borrowing even a penny. This makes the aforementioned ROE figures even more impressive.

As for dividends, Admiral currently yields an attractive 6.3% from a payout ratio of 86.4%. Free cash flow, meanwhile, averages £147.7 million over the past five years versus an average net profit of £145.3 million, which is very acceptable.

At this point, Admiral appears to be nigh on perfect. It has a substantial economic moat, operates in a favourable sector, has performed exceptionally well (the company, not the share price) over the past five years, has excellent free cash flow, a generous dividend and absolutely no debt.

The catch

Unfortunately, there’s a catch. In spite of its share price falling from 1,200p to 800p in November 2011, and currently being 985p, it remains overpriced. Net asset value of 130p per share equates to a price-to-book ratio of 7.6 (which is very high), and a price-to-earnings ratio of 13.6 is also rather generous.

Thus in spite of being a high quality company, Admiral is simply too expensive to merit purchase at its current price. Even though the above analysis shows that it has more positives than negatives, the current share price is too big a negative to overlook.

Aviva remains more attractive for tight-fisted value investors like me.

Smart Investor owns shares in Aviva.

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