This FTSE 250 share used to yield 10%. Is now the moment to buy?

Here’s one from the FTSE 250 that started the year with a double-digit dividend yield. Could buying it now offer a potential bargain if the business recovers?

| More on:

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.

One English pound placed on a graph to represent an economic down turn

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The FTSE 250 contains some fast-growing companies on their way up. But some of the shares in the index are fallen stars that used to be in the benchmark FTSE 100 group.

One such business is insurer Direct Line (LSE: DLG). Its shares had been getting cheaper for a while, meaning they had a double digit yield at the start of this year. Then the company issued a profit warning, abruptly cancelled its dividend and the shares plummeted.

Looking forward though, could now be a good moment for investors to reconsider the merits of owning Direct Line?

Improving business prospects

The FTSE 250 company is under new management since the dividend cancellation. It has also been making steps to right the ship and focus its business strategy.

This month, the firm announced it has agreed to sell its brokered commercial insurance business. That involves Direct Line receiving an initial payment of £520m, equivalent to more than a fifth of its current market capitalisation.

It could also earn up to £30m based on how the business perform in future, as well as being able to release capital of up to £270m over time. The deal will not stop Direct Line continuing to sell insurance to small businesses directly.

Although the number of in-force policies fell in the first half compared to the prior year period, gross written premiums and fees from ongoing operations rose by almost 10%. That suggests the firm may be tackling one of the areas it was struggling with before, namely covering rising costs by pushing up premiums.

Still not out of the woods

However, some things about the FTSE 250 firm continue to concern me. The loss before tax for the first half was far higher than in the prior year period, at £76.3m. Direct Line also announced that it would set aside around £30m to compensate policyholders who had been historically mischarged.

That charge came in at a lower level than some City analysts had feared. Still, it brings to mind for me the Warren Buffett aphorism that there is never only one cockroach in the kitchen.

Direct Line shocked investors by cancelling its juicy dividend this year. The historical misselling costs also came as a nasty surprise. The company remains lossmaking and I am still not entirely clear I understand why Direct Line suffered quite so badly in a market where rival underwriters facing similar challenges continued to perform fairly well.

Ongoing turnaround situation

The Direct Line share price has moved up lately as investors greeted the brokered commercial insurance disposal positively.

I think there could be more share price rises ahead as the business has a lot of experience, huge customer base, and well-known brands including Churchill as well as the eponymous Direct Line brand.
if it can get its motor insurance business performance into gear, the company has indicated that it could restart dividends.

But despite the promise, this still feels like a turnaround situation to me. When it comes to my own portfolio, I will hold off buying this FTSE 250 share until there is clearer evidence the business’s performance has turned the corner.

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.

C Ruane has no position in any of the shares mentioned. 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.

More on Investing Articles

Investing Articles

What kind of return could I expect by investing £100 monthly in a Stocks and Shares ISA?

Using a Stocks and Shares ISA to avoid capital gains tax could grow a £100 monthly investment into a second…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

Can strong operational momentum keep the Informa share price rising?

FTSE 100 company Informa has been performing well, but this may be just the beginning of a multi-year trend for…

Read more »

Market Movers

What’s going on with the Britvic share price?

Jon Smith flags up why Britvic's share price is surging on Friday, but believes that the company is in a…

Read more »

Cheerful young businesspeople with laptop working in office
Dividend Shares

2 super-cheap passive income shares I’m eyeing up right now

Jon Smith discusses two of his favourite passive income shares in the banking and property sectors, both featuring yields above…

Read more »

Chalkboard representation of risk versus reward on a pair of scales
Investing Articles

Up 37.5% in just 12 months, I think this is one of the FTSE 100’s best investments

Our author says this FTSE 100 company is likely to keep on capitalising on the AI and data boom. But…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

This UK share just spiked 15% on bid news. Can we bag a quick profit?

UK share prices are having a good 2024, so far, and this one's already up 39%. Two takeover bids in…

Read more »

Young Caucasian man making doubtful face at camera
Investing Articles

I’m ‘blowing a raspberry’ at Raspberry Pi shares. Here’s why

Some early investors have made great profits from Raspberry Pi shares. But our writer's questioning whether the 'easy money' has…

Read more »

Asian man looking concerned while studying paperwork at his desk in an office
Dividend Shares

Here are brokers’ new price targets for Legal & General and National Grid shares

City analysts are generally very positive on National Grid shares. But they're not quite as bullish on the Legal &…

Read more »