There are things to love and loathe about most companies. Today, I’m going to tell you about three things to love about Direct Line Insurance Group (LSE: DLG).
I’ll also be asking whether these positive factors make Direct Line a good investment today.
Shareholder friendly
Direct Line joined the stock market less than a year ago. From the start the company gave shareholders a clear idea of what to expect in the way of dividends: a final dividend for the 2012 financial year representing 50-60% of profit, and a progressive dividend policy thereafter.
Management’s aim is to increase the dividend annually “in real terms”. On top of that, if the board believes the group has capital surplus to requirements, it will consider returning capital to shareholders concurrently with any final dividend.
High yield
Direct Line paid an 8p final dividend for 2012, and last month declared a 4.2p first-half dividend for 2013, giving a trailing yield of 5.5% at a recent share price of 220p. Looking forwards, the yield rises to 5.8% on analyst forecasts of a 12.7p full-year dividend.
That’s a great income to kick off with, and the City experts reckon the dividend will increase by about 8% for 2014. Don’t forget there could also be returns of capital on top of the regular dividend in future.
Cost cutting
Direct Line has made good progress on its cost-cutting targets announced a year ago. The company has now increased its target for 2014 from £100m to £130m to give an overall cost base of £1,000m.
Analysts see pre-tax profit leaping to over £450m during 2014 from the £320m they’re forecasting for 2013. As a result, the price-to-earnings ratio falls from 11.4 to a ‘value’ rating of just 9.2.
A good investment?
You don’t get companies trading on a single-digit P/E with a dividend income of 5.8% without the market being concerned about some aspects of the business. In Direct Line’s case the car and home insurance markets are more viciously competitive than they’ve ever been, and there’s the matter of the company actually delivering on its cost-saving plans.
In short, as the P/E and yield indicate, Direct Line isn’t a low-risk investment. However, there’s a potential double turbo-charged reward if the company delivers: capital growth from a re-rating of the P/E and a tasty growing income from that high starting yield.
Finally, let me say that if you’re interested in a lower risk high- income share, you may wish to read about the Motley Fool’s No. 1 dividend stock.
You see, our top income analyst believes this company, which currently offers a 5.7% yield, will provide investors with steady annual dividend growth for many years to come. Not only that, but he calculates the stock is trading today at over 100p a share below current fair value of 850p.
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> G A Chester does not own any shares mentioned in this article.
