I’m always searching for shares that can help ordinary investors like you make money from the stock market. However, many people are currently worried the market has been overheating.
So right now I’m analysing some of the most popular companies in the FTSE 100, hoping to establish if they can continue to outperform in today’s uncertain economy.
Today I’m looking at insurance company Direct Line (LSE: DLG) to determine whether the shares are still safe to buy at 228p.
So, how’s business going?
Since coming to the market in October last year, Direct Line has impressed investors, many of whom are excited about the company’s outlook.
Personally, I believe the market is right to be enthusiastic about the insurer’s prospects, as Direct Line’s management is targeting profitability ahead of growth in the UK’s tough motor insurance market.
Indeed, management stated within the company’s first-quarter trading update that “the company will target underwriting profitability, in this tough economic environment, even if this is at the expense of volume.“
This strategy seems to be working, as the company registered a year-on-year rise in operating profit of 33% for the first quarter of this year, despite a 4.5% fall in the number of insurance premiums written.
Furthermore, Direct Line has set out a plan to achieve £200 million in annual cost savings by 2014, which should continue to drive profits higher.
Management has wasted no time in getting this plan underway, announcing at the end of last month that the company was going to cut 2,000 UK jobs, or 14% of its workforce, this year as a start to its cost-cutting programme.
Expected growth
Unfortunately, while Direct Line is focused on profits over volume, many City analysts expect the company’s earnings to fall this year. Still, analysts expect the company to return to growth during 2014.
City forecasts currently predict earnings of 19p per share for this year (a fall of 15%) and 24p for 2014.
Shareholder returns
Direct Line currently supports a 3.7% dividend yield — less than that of its peers in the non-life insurance sector, which currently offer an average dividend yield of 4.2%.
However, City analysts forecast the company will increase its payout around 60% this year to 12.6p a share, indicating a prospective dividend yield of 5.4%.
Valuation
As Direct Line’s earnings are expected to fall this year, the company currently trades at a discount to its peers.
Direct Line currently trades at a historic P/E of 10.4, while its peers trade at an average historic P/E of around 13.1.
Foolish summary
Overall, based on the company’s discount to sector peers, aggressive cost-cutting plan and prospective dividend yield, I believe that Direct Line still looks safe to buy at 228p.
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In the meantime, please stay tuned for my next FTSE 100 verdict
> Rupert does not own any share mentioned in this article.
