46% undervalued with a 6.8% forecast dividend yield, should I buy more of this overlooked FTSE gem now?

FTSE 100 insurance titan Admiral (LSE: ADM) is down 6% from its 20 July one-year high of £34.63.

This follows a 37% jump from its 20 November 12-month low of £23.82. As such – and in the absence of any bad news on the firm – I think this pullback simply results from profit-taking.

Nonetheless, it could mean an opportunity to buy the stock on the cheap. So, I ran the key numbers and looked again at the business to find out if this is the case.

The underlying business

A risk to the firm is the high degree of competition in its key insurance sector. This could squeeze its margins over the long run.

However, its full-year 2024 results released on 6 March were nothing short of spectacular, in my view.

Profit before tax soared 90% year on year to £839.2m, with earnings per share jumping 95% to 216.6p.

As a result, it increased its dividend by a whopping 86% to 192p, giving a current yield of 5.9%. By contrast, the average yield on the FTSE 100 is 3.6%.

Its Solvency ratio rose 3% to 203%, far surpassing the minimum regulatory standard of 100%.

Moreover, it added 1.4m new customers to the firm over the period.  

The share valuation

A stock’s price is simply what the market is prepared to pay at any given time. However, its value is derived from the business’s fundamentals.

Identifying the difference between a share’s price and value is where big long-term profits are made, in my experience. This includes several years as a senior investment bank trader and head of various financial markets’ sales and trading operations. It also reflects 35 years as a private investor.

The optimal way to assess this difference, in my view and that of many other analysts, is through discounted cash flow analysis (DCF).

This pinpoints where any firm’s share price should be, based on cash flow forecasts for the underlying business.

Using other analysts’ numbers and my own, the DCF for Admiral shows it is 46% undervalued at the present £32.57.

Therefore, the fair value for the stock is £60.31.

The dividend yield

As solid as the current 5.9% dividend yield is, consensus analysts’ forecasts are that it will rise.

More specifically, the projections are that the dividend will be raised to 206.4p this year, 211.7p in 2026, and 223p in 2027.

These would give respective yields on the current share price of 6.3%, 6.5%, and 6.8%.

Ignoring these forecasts and using just the current 5.9% yield as an average, another £10,000 investment from me would make £8,014 in dividends after 10 years. And on the same basis, this would rise to £22,450 after 20 years.

Adding in my £10,000 initial investment, this would generate an annual dividend income of £1,915 by that time.

These figures are based on the dividends being reinvested back into the stock – known as ‘dividend compounding’.

Will I buy more?

Analysts forecast that the company’s earnings will grow by 4.7% a year to the end of 2027. This should continue to drive Admiral’s share price and dividends higher.

As such, I will buy more of the shares very soon.

The post 46% undervalued with a 6.8% forecast dividend yield, should I buy more of this overlooked FTSE gem now? appeared first on The Motley Fool UK.

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Simon Watkins has positions in Admiral Group Plc. The Motley Fool UK has recommended Admiral Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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