Today, the long-term investing case for Admiral Group (LSE:ADM) shares is put under the microscope by two Fools with opposing stances…
Bullish
By Stephen Wright. I’m bullish on Admiral stock for a simple reason – the company has a durable competitive advantage in a service that people need. For me, that’s a winning combination for the long term.
Drivers have to buy car insurance, whether they want to or not (I suspect most don’t). This is a good thing, but the competitive nature of the industry means a lot of insurance companies struggle to maintain consistent profitability.
Admiral, though, has outperformed the average of its peers with its underwriting for each of the last 10 years. And that’s not an accident – it comes from the company’s use of technology, data, and analytics.
If that doesn’t indicate a durable competitive advantage, then I don’t know what does. There are some short-term headwinds, like inflation driving up the price of cars and repairs, but I like the look of this stock for the long term.
Stephen Wright does not own shares in Admiral.
Bearish
By Royston Wild. In bygone days, motor insurance premiums that are rising by high single digits would be celebrated by the industry. But these aren’t normal times, and profitability at businesses like Admiral continues to be crushed by elevated levels of claims inflation.
Latest figures from the Association of British Insurers (ABI) illustrates the scale of the problem. The average motor premium rose 8% quarter on quarter between October and December of last year. Yet this was still offset by soaring claims costs.
The price of paint repairs, for example, leapt 20% over the period. And courtesy car costs rose 30%, according to the ABI.
There’s only so far Admiral can pass these higher costs onto customers before they become unaffordable to drivers. This is why Admiral was forced to eat a 39% decline in pre-tax profits last year, and to slice the full-year dividend down by a similar percentage.
I think conditions could remain tough for some time to come, too. So I’m looking past this former dividend hero and seeking other stocks for passive income.
Royston Wild does not have a position in any of the shares mentioned.
