Why Direct Line Insurance Group PLC Should Be A Candidate For Your 2014 ISA

Direct Line Insurance Group PLC (LON: DLG) is a newcomer with great potential.

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direct lineWhen it comes to selecting shares for an ISA, one of the key things I look for is a solid track record.

But I’m going to go out on a limb when it comes to Direct Line Insurance (LSE: DLG), which has only been a publicly quoted company since October 2012.

I reckon Direct Line should be a serious contender for a slice of that new £11,760 allowance that’s coming our way in April — or perhaps for anything remaining from this year’s allowance.

The show so far

Before I explain why, let’s see how Direct Line’s short life has gone so far:

Jun EPS Change P/E Dividend Change Yield Cover
2012 21.8p n/a 9.9 8.0p n/a 3.7% 2.7x
2013 25.1p +15% 9.9 12.6p +58% 5.0% 2.0x
2014* 22.5p -10% 11.7 13.7p +8.7% 5.2% 1.6x
2015* 25.9p +15% 10.2 14.9p +8.8% 5.7% 1.7x

* forecast

Now, short history notwithstanding, that looks like pretty typical for a healthy insurance company to me, with dividends yielding around 5% and reasonably well covered by earnings.

And in addition to that 12.6p per share ordinary dividend paid for 2013, Direct Line has also rewarded shareholders with something extra in the form of special dividends — 4p per share for the first half, plus 4p at year-end, paid from the sale of Direct Line Life to Chesnara.

That’s a total of 20.6p per share in cash for 2013, which could work wonders in an ISA if it’s reinvested in more shares for 20 years.

Long-term strength

So, why am I not too bothered by Direct Line’s short life? Well, it’s really because it has actually been operating as a business for far longer as part of Royal Bank of Scotland, and its independent life is all part of RBS’s disaster-recovery restructuring.

At IPO time in October 2012, RBS offloaded 30% of its holding into the eager hands of private investors, with a further 17% sold off in March 2013 followed by 20% in September — the rest is to be divested during the remainder of 2014.

Direct Line made an operating profit of £536.5m in 2013, and with a market cap of £3.3bn it’s no small fry, even if it is just outside the FTSE 100.

Long-term value

What might an investment in Direct Line be worth in 20 years time? Well, a steady dividend yield of 5.5% reinvested in shares each year would compound a starting pot of £1,000 into a very nice £2,900 — even with no share price rise.

And if we guess at an annual share price rise of 3% plus dividends of 5%, we could end up with £4,600 — a typical cash ISA would get you just £1,300 at today’s interest rates.

Worth an investment?

So is Direct Line worth stashing in an ISA? Well, it is riskier than some of the bigger and more established insurers. But it’s off to a good start on its own two feet, and it’s in an industry that undoubtedly has a strong future — and the post-recession world is looking good for insurers.

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.

> Alan does not own any shares in Direct Line or RBS.

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