What’s Telling Me To Buy Direct Line Insurance Group Plc Today

Royston Wild considers the investment case for Direct Line Insurance Group plc (LON: DLG).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Today, I am looking at Direct Line Insurance Group (LSE: DLG), and deciding whether to add the stock to my own personal investment portfolio.

Profits continue to surge at transformed group

Direct Line reported at the start of August that operating profit leapt a gargantuan 27.8% in the first six months of 2013, to £286.6m, as the effect of mild weather patterns helped to reduce the number of claims it received. Fewer applications also helped the group’s combined operating ratio for continuing operations drop to 94.6% from 101.1% in the first half of 2012.

Profits have also taken off in recent times as the group’s restructuring plan has taken hold, with Direct Line’s cost-cutting initiatives also critical in driving first half operating profits. And the firm has pencilled in another £1bn worth of cuts to be implemented next year. The company’s transformation programme has helped to improve performance across the entire group, and specifically operating profit from its Commercial and International arms doubled in January-June versus the same 2012 period.

Direct Line is operating in an increasingly competitive space in its core UK markets, however, and the business saw gross written premiums fall 4% in the first half. Still, the home and motor insurance giant is expanding its already-weighty product portfolio to take the fight to the competition. I am also confident that rising business activity in Europe should also keep earnings ticking higher.

Insurer well placed to ride out short-term pressure

City brokers expect Direct Line’s transformation strategy to keep the company heading in the right direction, even though earnings are expected to remain under the cosh in the near term. A 12% slip in earnings per share, to 19p, is pencilled in for 2013. But a 25% snapback is anticipated next year, to 24p.

The insurer currently changes hands on a P/E rating of 11.3 and 9.1 for 2013 and 2014 respectively. Given that the firm looks on course to deliver blistering growth looking further ahead, in my opinion this represents excellent value — the FTSE 100 and non-life insurance sector carry forward P/E values of 18.6 and 11 correspondingly.

Take the direct line… to marvellous dividends

Although Direct Line trails its industry rivals in terms of P/E ratio, the former far outstrips its competitors in terms of forward dividend yield. The company currently boasts a yield of 5.9% versus 4.6% for the rest of the UK’s non-life insurers. And an expected rise in Direct Line’s earnings next year supports an eye-watering yield of 6.4%.

If you are looking for other blue-chip beauties primed to produce massive dividends, you should check out this brand new and exclusive report which singles out even more stock market stars to really jump start your investment income.

Our “5 Dividend Winners To Retire On” wealth report highlights a selection of incredible stocks with an excellent record of providing juicy shareholder returns. Among our picks are top retail, pharmaceutical and utilities plays which we are convinced should continue to provide red-hot dividends. Click here to download the report — it’s 100% free and comes with no further obligation.

> Royston does not own shares in Direct Line Insurance Group.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Investing Articles

Young black man looking at phone while on the London Overground
Investing Articles

This 10.6% yielder beats every dividend share on the FTSE 100. Can it last?

Harvey Jones couldn't resist the double-digit yield on offer from this FTSE 100 stock. Now he'd like to get some…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

With the FTSE 100 flying, I love the look of this company

The FTSE 100 index has been in rally mode over the last few months, but I think one of it's…

Read more »

Investing Articles

17% of my Stocks and Shares ISA is invested in these 2 UK shares

Stephen Wright looks to focus on investments in companies that have strong competitive advantages. And two UK shares stand out…

Read more »

Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA into Lloyds shares

Harvey Jones bought Lloyds shares last year and is kicking himself for failing to buy even more of them. The…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

Apple is still my favourite company in the S&P 500, here’s why

Apple recently unveiled a lot of new software at a developer conference. Here's why the tech giant is still my…

Read more »

Investing Articles

5 great value UK companies I’d buy in a Stocks and Shares ISA and aim to hold for decades 

Harvey Jones is getting to work on his Stocks and Shares ISA. He thinks these five firms have solid income…

Read more »

Value Shares

Are GSK shares a bargain after falling 11%?

GSK shares have taken a hit in recent weeks due to Zantac uncertainty. Here, Edward Sheldon looks at whether they’re…

Read more »

Investing Articles

Nearing £5, could the Rolls-Royce share price hit £6?

The Rolls-Royce share price has soared in the past year. Our writer thinks there could be a strong runway ahead…

Read more »