The Direct Line Insurance Group (LSE:DLG) share price may have sprung higher this week. But on paper there’s a lot for fans of cheap shares to still like about the recovering FTSE 250 stock.
At 179.5p each, Direct Line shares trade on a forward price-to-earnings (P/E) ratio of 12 times. This is lower than the average of 14 times that UK blue-chip shares currently command.
As a value investor I’m especially attracted by the size of the company’s dividend yields. These sit at 6% and 8.8% for 2023 and 2024, respectively.
However, can I rely on the insurance giant to pay the large dividends City brokers expect? And should I buy Direct Line shares for my portfolio today anyway?
Chequered history
Now, the business hasn’t been a reliable dividend payer in recent times. For 2022 it paid a total of 7.6p per share, down from 22.7p the previous year. It binned the final dividend as it sought to save cash in light of soaring claims costs.
Direct Line also opted not to pay an interim dividend when it released half-year results this week. Instead it advised that it won’t restart payments until it sees an improvement in the capital coverage at the upper end of its agreed range and a return to organic capital generation in Motor.
The company’s solvency capital ratio remained at 147% in June, in line with levels at the start of the year and at the lower end of its target 140% to 180% range. However, it said the sale of its brokered commercial insurance business to RSA Insurance for up to £550m will boost its ratio by around 45 basis points.
Good and bad
Direct Line’s half-time update was a bit of a mixed bag. Price hikes meant that gross written premiums and associated fees rose 9.8% between January and June, to £1.6bn.
Encouragingly the firm’s core Motor unit is showing the green shoots of recovery. Average renewal premiums jumped 25% year on year, while improved underwriting pushed the net insurance margin to 10%.
However, those pricing actions meant the number of in-force policies dropped 3.2% across the group, to 9.36m. Pre-tax losses, meanwhile, widened to £76.3m from £11.1m in the first half of 2022.
Earnings continue to be adversely affected by the earn-through of Motor policies written last year. Claim cost inflation is another problem that Direct Line expects to remain in “high single-digits” in 2023.
Am I buying?
Okay, Direct Line is showing early signs of progress with its turnaround strategy. But it could be some time before it begins paying dividends again, especially as high claims costs threaten to drag on into 2024.
What’s more, its plan to get back to profitability could be scuppered if policy numbers continue crumbling. High levels of competition leave customers with plenty of choice if they don’t like their insurance quotes.
Direct Line is a share I’ll be watching. But right now I think there are better stocks to buy for passive income.
