Admiral shares soared to the top of the FTSE 100 leaderboard on Monday after the insurer announced a special dividend.

The special dividend was made possible by a very strong first half for Admiral, in which profit before tax grew 32%, driven by a 43% surge in revenue.

Investors were not only rewarded with a 19.7p per share, but a bumper increase in the ordinary dividend from 51p to 71p.

After a challenging period for insurers, shareholders would have been delighted when they digested the group’s half-year report and a sharp increase in customer numbers and insurance premiums.

“If something goes wrong, we might ask – will the insurance pay out? Admiral certainly has this morning, announcing a special dividend after posting a very robust set of results,” said Adam Vettese, Market Analyst at investment platform eToro.

“Inflation has sent costs of everything higher, insurance premiums included, which is great for firms like Admiral, but the firm has astutely used that buffer in the first half of this year to cut prices and get a competitive edge on its peers. It’s hard to argue against this strategy having paid off with turnover up 43%.”

“This performance was predominately driven my motor policies and with the acquisition of More Than, Admiral can bolster its household and pet divisions with diversity. As inflation eases, we could see premiums cool off further which no doubt the firm will have one eye on. Shares are still almost 30% away from their post-Covid peak and investors will be hoping more strong performance can propel the price back up towards those levels.”

After it was revealed Berkshire Hathaway sold around 400 million Apple shares, almost half of its total holding, the group founded by Warren Buffett released a more comprehensive insight into recent portfolio activities yesterday.

Although Berkshire Hathaway was a net seller of stocks during the second quarter, it did deploy some of its massive cash pile in two new positions.

The two companies are Ulta Beauty, a beauty company, and Heico Corporation, an aerospace and electronics specialist. Given Warren Buffett’s ideal holding period is forever, these two stocks attracted investor attention overnight, with both gaining in the US aftermarket.

With $227m allocated to Ulta and $247m to Heico, the new additions will do little to dent Berkshire’s $278bn cash pile. In addition to the two new positions, Berkshire increased its stakes in Chubb, Occidental Petroleum, and Sirius XM.

Chevron and T-Mobile were among the stocks sold by the group. 

Insights into Berkshire Hathaway’s portfolio were found in the group’s 13F disclosure, providing a rundown of recent portfolio changes. A raft of other asset managers and hedge funds released the same publication yesterday with notable buys of Nike by Bill Ackman’s Pershing Square and Lyft by David Tepper’s Appaloosa.

Aided by the news that inflation rose less than expected in July, the FTSE 100 gained on Wednesday in a relatively broad rally led by Entain and the housebuilders.

After the Bank of England cut rates to 5%, investors were eager for hints of when they would cut again. Although inflation rose to 2.2% from 2% in the month, the increase was less than economists forecast, increasing the chances the BoE will reduce borrowing costs again before long.

Lower services inflation and falling food costs contributed significantly to the lower-than-expected inflation read, while energy prices were the main driver of the overall increase.

“Today, markets had a keen interest in services inflation – after two consecutive months of hotter-than-expected readings at 5.7%, the hawkish Bank of England committee members, who voted to hold, highlighted this as a critical factor, making it a key market signal. Today’s 5.2% print vs 5.5% expected print validates the more dovish committee members and potentially leaving room for not just one more cut this year but two,” said Pierre Roke, Associate at Validus Risk Management.

The prospect of two more interest rate cuts in 2024 fired up the UK equity bull, sending the FTSE 100 0.2% higher in midday trade.

“A lower-than-expected jump in UK inflation has boosted market expectation that the Bank of England could deliver another rate cut next month,” said AJ Bell head of financial analysis Danni Hewson.

Housebuilders were big beneficiaries of hopes around interest rates, with Persimmon, Barratt Developments and Taylor Wimpey among the top risers.

Entain, up 5%, was the top riser after peer Flutter released an upbeat Q2 update demonstrating growth in the US, where Entain has a growing presence.

Consumer-focused shares were also well bid after inflation data showed easing pressures. JD Sports was 1.9% higher, and Marks & Spencer rose 1.5%.

The gains in London eased shortly after US inflation data showed that prices rose slightly more than expected month over month.

FTSE 100 defensive dividend-paying stocks have suffered twofold during the two years of higher interest rates.

First, higher rates have weighed on their earnings by squeezing margins due to higher financing costs, and some have suffered due to reduced consumer spending power.

Second, investors have shunned defensive dividend payers in the era of higher rates because they were able to get 4% risk-free in government bonds.

Both of these factors are about the be turned on their heads. The change won’t be dramatic, but it will certainly make these companies’ shares more attractive.

Reckitt Benckiser

Reckitt Benckiser hasn’t traditionally been a huge dividend payer, but recent performance has made the consumer goods company’s yield – now 4.6% – a bit more attractive.

The company sells approximately 30 million consumer products across defined product portfolios: hygiene, health, and nutrition. Reckitts owns a range of household names, including Air Wick, Clearasil, Dettol, Durex, and Neurofen.

Reckitt Benckiser has been hit by consumers opting for cheaper alternatives amid the cost-of-living crisis, and volume growth hasn’t been great. They’ve been forced to increase prices to fight input price inflation, and this has just about offset higher costs. Operating margins fell 30bps in the first half of 2024, and investors jumped ship. 

Although Reckitt’s volumes grew over the first half of 2024, Q2 saw a volume decline of 2.2%. Revenue was flat during the period, and this has been reflected in the share price, which is now down 21% year-to-date.

We do not assert that this trend is completely finished or that it will reverse anytime soon; rather, we suggest that it is unlikely to get much worse for Reckitt Benckiser. 

With sentiment around the stock near rock bottom, it’s likely most of the investors who were keen to sell the stock have done so, leaving a clear path for recovery in the share price as buyers tip-toe back into the company. 

Lower interest rates will put more money back into the pockets of consumers who may return to branded household goods as confidence returns. This is key to any Reckitt Benckiser investment case.

United Utilities

As a lower beta water utilities company, United Utilities is as defensive as it comes. There are concerns about potential regulatory action due to the dumping of sewerage into waterways that may cap gains, but any action is unlikely to materially affect the long-term Investment case.

With a 4.9% yield, the stock has an adequate dividend to compensate for any lengthy waits for capital appreciation.

During times of heightened volatility and economic duress, investors flock to utility companies to avoid the wild ride some cyclical shares can experience. United Utilities would be a beneficiary in such a scenario. Lower interest rates are also likely to help the company.

Despite UU’s reliable income, there is little opportunity for major growth. The amount it can charge for the treatment and distribution of water is heavily regulated, and any major movement to the top line is unlikely. Revenues fluctuated by around 2% between 2022 and 2023.

The dictator of United Utilities’ profits is everything that comes below top-line revenue – finance costs being a major factor.

The group experienced a sharp uptick in its finance costs between 2022 and 2023 as interest rates rose, eroding profitability. 

One would expect this to reverse as interest rates fall and help bolster United Utilities’ dividend. Investors should watch the company closely for any dips relating to regulatory action and use dips as a potential buying opportunity.

Shell 

We understand Shell’s suggestion isn’t amazingly original, and it’s not particularly defensive, either. However, investors are able to pick the stock up with a 3.7% yield at current prices that offer a reasonable probability of capital appreciation over the medium term.

Oil prices have slipped back on concerns about global growth and taken Shell shares with them. Investors have become desensitised to ongoing geopolitical risks, and the windfall provided to oil majors such as Shell has all but disappeared.

That said, although recent results revealed a drop in Q2 adjusted EBITDA compared to Q1, EBITDA for the first half of 2024 was broadly in line with the first half of 2023 – despite significantly lower oil prices.

Shell remains a cash-generating machine and is fully prepared to distribute this cash back to shareholders through regularly increasing dividends. The group generated $10bn free cash flow in Q2, higher than in Q1.

Strong cash flow enabled Shell to increase its dividend to $0.688 over the first half of 2024 compared to $0.6185 in 2023.

In addition to the dividend, Shell provides investors with a holding that can move favourably in times of increased global tensions, such as those we are currently experiencing.

The interest rate story is heavily intertwined with oil prices and, therefore, Shell, from the demand side of the story. US growth wobbles are playing a big part in lower oil prices. Conventional thinking around lower interest rates would suggest incoming rate cuts will boost overall growth, providing support for Shell.

There have been rumblings Shell is considering a switch to US markets to achieve a better valuation. While this would be a real blow to London and is far from a certainty, it does highlight the deep value in Shell shares compared to US peers.

Aviva shares were marginally down on Wednesday despite the insurer and retirement firm beating expectations in the first half of 2024.

The group’s efforts to offer the full suite of insurance, wealth and retirement needs are paying off. Sales increased 12% in the first half of the year, and investors will be delighted to see operating profit increase by 14% in the period.

Aviva’s already generous dividend continues to climb, further solidifying the company’s attributes as an income pillar of many portfolios.

“Sales are up. Operating profit is up. The dividend is up. Our plan to deliver more for customers and shareholders is working really well,” said Amanda Blanc, Aviva’s Group Chief Executive Officer.

“We have achieved another six months of excellent trading. We have generated growth right across Aviva, thanks to our leading positions in attractive markets such as workplace pensions and general insurance in the UK and Canada.”

Aviva is the number one provider of workplace pensions, and the affinity this has built with its brand has helped the group excel in other areas of its business.

“Aviva has beaten analysts’ profit estimates, helped by insurance premiums rising 18% in the UK and Ireland,” said Adam Vettese, Market Analyst at investment platform eToro.

“This won’t be too much of a surprise given the inflationary environment we have been in. The insurer’s cash position is strong and has also nudged up the dividend after completing a £300m share buyback. Given topical concerns over volatility and macro factors perhaps injecting some uncertainty back into the market, Aviva seems like a pretty solid place for investors to shelter from such conditions with shares up 13% so far this year.

“Aviva is looking to achieve £2bn operating profit by 2026 which could be a punchy target if premium growth starts to level off. Investors may then look to the retirement sales numbers which came in lower than last year to rebound in order to pick up the slack.”

Ahead of its final results being announced on Tuesday 29^th October, this morning Ultimate Products (LON:ULTP) has issued its Pre-Close Trading Update for the year to end July. 

The group, which sells to over 300 retailers across 38 countries, specialises in five product categories: Small Domestic Appliances; Housewares; Laundry; Audio; and Heating and Cooling.  

Its brands include Salter (housewares), Beldray (laundry and floor care),  Progress (cookware and bakeware), Kleeneze (laundry and floorcare), Petra (small domestic appliances) and Intempo (audio). 

Under licence it also has the Russel Hobbs brand name for its cookware and laundry products. 

The Update  

Unaudited group revenues decreased 6.5% to £155.5m (FY23: £166.3m) with supermarket ordering held back by overstocking, weakened consumer demand for general merchandise, and strong prior year comparatives having been bolstered by the exceptionally strong demand for energy efficient air fryers in H1 2023. 

In line with market expectations, unaudited adjusted EBITDA decreased by 11% to £18.0m (FY23: £20.2m) and unaudited adjusted PBT* decreased by 14% to £14.4m (FY23: £16.8m). 

At the year end, the group had a net bank debt of £10.4m (FY23: £14.8m), which represents a net bank debt / adjusted EBITDA ratio of 0.6x (FY23: 0.7x), well within the group’s capital allocation policy of 1.0x. 

Trading at the start of the current financial year is in line with market expectations. The significant increase in shipping rates, arising from disruption in the Red Sea, has seen some recent stabilisation and is leading supply chains to adapt to a new normal.  

While this process takes place, the group’s commercial teams are working hard, as they did in the previous shipping crisis, to mitigate the short-term impact on gross margin. 

Management Comment 

CEO Andrew Gossage stated that: 

“Our FY24 performance was not without its challenges but I am pleased to report that many of the temporary headwinds are now easing, as reflected in a healthy FY25 order book.  

As we look ahead to FY25 with cautious optimism, we are confident in the proven resilience of our business model and the ongoing demand for our fantastic range of leading homeware brands.” 

Analyst Views 

Chris Wickham and Hannah Crowe at Equity Development consider that the group’s share rating looks too low, sticking with their 200p estimated ‘Fair Value’ for the shares. 

They estimate that the year to end July 2025 will see revenues rise to £172.0m (est £155.5m), with adjusted EBITDA of £20.6m (est £18.0m), lifting earnings to 14.5p (est 12.3p) and paying a dividend of 7.2p (est 6.1p) per share. 

Sector analysts Clive Black and Darren Shirley at Shore Capital are pleased to note the management’s warm words for the current year prospects. 

They are looking for 2025 to show £17.5m pre-tax profits, worth 15.3p in earnings and a 7.4p current year dividend per share. 

At Canaccord Genuity Capital Markets analyst Mark Photiades has an unchanged Buy rating on the shares looking for 182p in due course. 

His estimates are for £171.1m sales, £17.8m adjusted pre-tax profits generating 14.9p in earnings and paying a 7.5p dividend per share. 

In My View 

The shares are down nearly 3% on the news, trading at 136p and valuing the group at only £117m. 

On the analyst estimates they trade on a very low valuation of just 9.1 times current year earnings and way below valuation levels. 

In late April this year they were up to 185.50p, a level at which to aim for repetition.