After 25 years at the top, Admiral’s (LSE: ADM) chief executive and founder, Henry Engelhardt, announced this week that he will step down from the insurer’s board in a year’s time.
And after presiding over Admiral’s remarkable success for two-and-a-half decades, few will blame Mr. Engelhardt for wanting to take a back seat.
But should investors sell up and buy Aviva (LSE: AV) following this news?
Dividend champion
Over the years, Admiral has built a reputation for being one of the FTSE 100’s dividend champions.
Indeed, the company’s high returns on capital, strong cash generation, and prudent risk management, have allowed it to return a hefty chunk of profits to investors every year.
Over the past five years, the company returned a total of £1.1bn to investors via both regular and special dividend payouts. This works out as around 90% of Admiral’s net income generated over the period.
City analysts believe that Admiral will offer a dividend of 87.6p per share this year — a yield of 5.8%.
New management
When Mr. Engelhardt steps down from the day-to-day management of Admiral, it’s unlikely that this policy of returning excess cash to investors will change anytime soon.
Chief operating officer David Stevens has been picked to replace the outgoing CEO and also has a long relationship with the company. Mr Stevens has worked with Admiral since the insurer began life during 1991, so he knows the business inside out.
Further, when he leaves the company Mr. Engelhardt will remain one of Admiral’s largest shareholders. He still owns 12% of the company. This minority share will give Mr. Engelhardt the power to influence the decisions of Admiral’s management even after he leaves.
Lacking growth
However, Admiral is facing many challenges. For example, competition in the UK’s motor insurance market remains intense. Insurance premiums are under pressure across the industry, and Admiral’s international businesses are all underperforming.
Since opening its first overseas business during 2006, Admiral’s international division has never reported a profit.
And after a poor 2014, City analysts believe that Admiral’s earnings will remain under pressure for the next two years. Earnings per share are forecast to fall 12% this year, to 91p, a full 13% below the five-year high of 104.6p per share reported for full-year 2013.
Merger synergies
Aviva doesn’t offer the same level of income as Admiral, but the company does have a better outlook for growth.
After merging with peer Friends Life a few weeks ago, Aviva has become one of the largest players in the UK’s annuity market. What’s more, cost savings and merger synergies generated from the deal will help Aviva boost profit margins on higher sales figures.
Unfortunately, these benefits are not expected to flow through until 2016. One-off costs related to the deal are expected to hit Aviva’s earnings by 2% this year. Nevertheless, during 2016 earnings are set to rebound by 13% as the benefits of the deal start to show through.
Low cost
Overall, Aviva and Admiral are two very different investments. Admiral offers a high level of income, which is unlikely to change anytime soon. But the company does trade at a relatively high forward P/E of 16.7.
In contrast, Aviva only offers a dividend yield of 3.9%, but trades at a modest forward P/E of 11.1
So all in all, if you’re looking for income, Admiral’s your best bet. On the other hand, Aviva appears to offers growth at a reasonable price.
