The Motley Fool

Should I invest in Direct Line Insurance or Aviva shares right now?

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.

Sale agent deal to car loan contract with customer.
Image source: Getty Images

While insurance shares may not seem like the most exciting investment prospect, there’s plenty to unpack here. This often-overlooked, yet very important sector could be a solid dividend or retirement play for me.

That’s why I’m considering adding either Aviva  (LSE: AV) or Direct Line Insurance Group  (LSE: DLG) to my portfolio. 

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. And if you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio.

Click here to claim your free copy now!

But which insurance stock is a better buy right now?

Aviva

This multinational British business boasts more than 30m customers across 16 countries. In the UK, its home market, it is the largest general insurer and a leading life and pensions provider.

The Aviva share price has had a strong 12 months. It has risen 64% from 243p to 400p today despite a tough 2020.

I really like this stock because of its reputation as a dividend hero. It pays out a 6% yield, which amounts to 14p on its 14 May payment date. Dividend payments are important for me when planning my portfolio for retirement.

The FTSE 100 firm is also taking steps to exit non-core foreign markets and focus on its UK, Irish, and Canadian operations. This drive saw it axe Polish and Italian operations last month. More such moves are expected to boost its balance sheet and create a leaner earnings-producing machine.

However, the insurance industry is an unforgiving one. As a life insurer, the company’s outlook is tied to interest rates. A sudden rise in rates could negatively impact its balance sheet, which would likely harm shareholder returns. This risk, and the general complexities of insurance, suggest this stock might not be suitable for all investors.

For me, however, despite it being difficult to value insurance shares accurately, Aviva seems cheap. With a low price-to-earnings ratio of just 8, I really like the look of this top UK share right now.

Direct Line Insurance

Among one of the UK’s largest insurers and a big competitor to Aviva, Direct Line Insurance is in my sights right now. 

It has been a very rocky 12 months for Direct Line, with its share price fluctuating between highs of 346p and lows of 258p. However, it has jumped almost 15% from 265p a year ago to over 300p today.

My bullish sentiment for this FTSE 250 share is based on its impressive 7% dividend yield. I also believe that recent earnings growth will continue. Direct Line enjoys a substantial competitive advantage in the insurance market due to its size. Economies of scale allow it to serve customers at a lower cost than competitors can, increasing profit margins.

Likewise, I am excited by its plans to invest in new insurance software. This will allow it to follow similar business models employed by the likes of Lemonade in the US, which uses AI software to price insurance more accurately and profitably.

My main concern with this business is that it has struggled to grow in recent years. The motor insurance market is competitive, making it hard to hike prices. It risks getting caught in a pricing war as more insurance options become available, potentially hurting its bottom line. I believe Direct Line’s brands should provide a long-term advantage, but I could be wrong.

Overall, I believe that these are two great stocks to invest in. However, Direct Line CEO Penny James’ commitment to innovation excites me just enough to give Direct Line my full interest. 

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

Jamie Adams has no position in any of the companies mentioned above. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.