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5.9 Reasons Which May Make Direct Line Insurance Group plc A Buy

Today I am explaining why I believe Direct Line Insurance Group (LSE: DLG) is an exceptional stock selection for investors seeking blockbuster dividends.

The direct route to delicious dividends

Shares in Direct Line have enjoyed a bumper time during the past month, rising 11% since the start of October and still charging towards August’s record above 236p. And I believe improving earnings and dividend prospects should keep the stock heading higher. Indeed, Direct Line currently provides a stonking 5.9% dividend yield for 2013, easily blasting the corresponding readouts for its industry peers out of the water.

Direct Line’s interims released last week underlined the stunning progress the insurer continues to make since being spun off from Royal Bank of Scotland last autumn. These financials revealed that operating profit had surged 20.1% higher during January-September, to £417.8m.

Meanwhile, an improvement in underwriting procedures, lower claims from major weather-related events, and reduced costs as instrumental in driving the combined operating ratio 4.3% lower to 95.4%.

Direct Line’s self-help measures since launching as an independent entity has helped to create a more streamlined and efficient earnings generator. The insurer saw costs drop 9.9% during the nine month period, to £259.9m, and has announced that it remains on track to deliver a reduced cost base to the tune of £1bn next year. As well, its divestment programme also continues to make steady progress, and the firm successfully sold its life insurance division to Chesnara for £62m last month.

On top of the firm’s ongoing restructuring plan, I believe that the firm’s diverse suite of market-leading products spanning the motor, home and travel spaces, provide a wonderful omen for future earnings, and thus dividend, potential. Indeed, City experts expect Direct Line to hike last year’s 8p per share dividend to 13.5p this year, representing an eye-watering 69% year on year increase.

And although forecasters expect the full-year payout to remain flat in 2014, dividends for this year and next translate through to an attractive 5.9% yield. This figure compares extremely well with a prospective average yield of 4.5% for its fellow non-life insurers, while it also beats the corresponding FTSE 250 reading of 2.9%.

And in my opinion Direct Line is a stunning value-for-money pick on both an earnings and dividend basis. The business currently deals on a P/E rating of 11.7 for 2013, surpassing the forward average of 12.1 for the rest of the non-life insurance sector. And for 2014 the company boasts a P/E rating of 9.8, below the watermark of 10 which represents stunning value.

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> Royston does not own shares in any of the companies mentioned in this article.