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FTSE 100 insurance firm Admiral (LSE: ADM) is a recent addition to my passive income portfolio.
This is comprised of shares bought to generate me high dividends without me having to do too much – hence the ‘passive’ label.
I am aged over 50 now and this income stream should allow me to further reduce my working commitments.
The only real effort involved in these passive income stocks is making the right choices in the first place. After that, it is simply a question of regularly checking that they are performing as required (which, of course, they may not be).
What are the qualities I want?
The first thing I want is a minimum 7% dividend yield. The ‘risk-free rate’ (UK 10-year government bond) is 4.6%, so the additional 2.4% is the compensation for the additional risk of shares.
However, I also consider stocks that are yielding slightly lower than that if their yields are forecast to rise. Yields change as a firm’s share price and annual dividend alter.
The second quality I look for is an undervalued share price. This reduces the chance of losing money if I sell and conversely increases the likelihood of making a profit.
And the final element I require is solid earnings growth potential in the underlying business. This is mainly what pushes any firm’s share price and dividends higher over the long term.
How does this stock stack up?
A risk in Admiral’s business is a renewed surge in the cost of living that may prompt customers to cancel their policies.
That said, consensus analysts’ estimates are that its earnings will increase by 6% a year to the end of 2027. This looks like a conservative figure to me, given its excellent recent results.
Its full-year 2024 pre-tax profit of £839.2m was nearly double 2023’s £442.8m. As a result, earnings per share soared 95% to 216.6p and the dividend was increased 86% to its current 192p level.
This dividend now yields 5.7% on the present share price of £33.72. However, analysts forecast the dividend will increase to 203.9p in 2025, 210.8p in 2026, and 222.8p in 2027.
These would generate respective yields of 6.1%, 6.3%, and 6.7% on the current stock price. This is not quite the 7% minimum I want, but I think earnings growth will push dividends higher.
And finally, a discounted cash flow analysis shows the stock to be 43% undervalued right now. Therefore, the fair value for the shares is technically £59.16.
How much passive income can be made?
£11,000 – the average UK savings – would buy 326 Admiral shares. On the current 5.7% yield this would generate £8,425 after 10 years and £49,573 after 30 years.
At that point, the total value of the Admiral holding would be £60,573. This would generate an annual passive income of £3,453.
These figures are also based on the dividends being reinvested in the stock – known as ‘dividend compounding’.
I am happy with the size of the holding I established recently. If I did not have it I would buy the shares as soon as possible, based on the firm’s strong results and good growth prospects.
