Today I am looking at why I believe Direct Line Insurance Group (LSE: DLG) provides a compelling investment case.
Strength in diversity
The Direct Line stable — which also includes the Churchill and Privilege insurance brands — benefits from its extensive product portfolio that encompasses the home, motor, travel and pet insurance sectors. It also runs the Green Flag car breakdown service, and its wide span of operations helps to mitigate over-reliance on any one sector.
And to combat the impact of increasing competitiveness in many of its markets, Direct Line is taking steps to remain at the forefront of addressing changing customer dynamics and needs, particularly the issue of rising premiums. This year the firm’s motor arm introduced telematic black box technology to cut insurance costs for more careful drivers, for example.
The insurance giant is also ratcheting up activity on the continent to underpin future growth, and has seen business in Germany and Italy shoot higher in recent times.
Accelerating cost-cutting to bolster earnings
Direct Line has embarked on an ambitious restructuring drive since last summer in order to deliver a more streamlined and efficient proposition. Last summer the company outlined plans to slash approximately £100m in gross annual costs in 2014, a move that would drive its cost base to around £1.134bn.
The insurer has since stepped up this restructuring, and announced in June plans to cut next year’s cost base closer to £1bn. Earlier this month the company slashed 90 jobs at its call centre operations in Glasgow, the Glasgow Evening Times reported, and comes on top of the 1,200 positions that have been axed since August 2012.
In all, up to 2,000 jobs across its UK operations are said to be under scrutiny, mainly in head office and support roles, and Direct Line remains engaged in talks with workers and unions to strip out further costs.
First-rate dividend prospects on offer
Direct Line is a favoured pick among investors who believe that the company is on the verge of shelling out competition-busting dividends. Indeed, City analysts expect last year’s 8p per share dividend to rise to 12.7p in 2013, a result which would represent blistering 59% dividend per share growth. Expansion is forecast to slow to a still-healthy 8% next year, to 13.7p per share.
These prospective payments mean that Direct Line currently carries a dividend yield of 5.9% and 6.4% for 2013 and 2014 respectively. This compares extremely favourably with a prospective average yield of 4.6% for the entire non-life insurance sector, and also comfortably outstrips the forward average of 2.9% for the wider FTSE 250.
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> Royston does not own shares in Direct Line Group.
