Three Ratios That Make Me Want To Buy Direct Line Insurance Group PLC Today

The flotation of Direct Line Insurance Group (LSE: DLG) in October 2012 was understandably popular with UK private investors, who welcomed the chance to buy a stake in a well-established UK brand, with good income potential.

So far, Direct Line has lived up to the hype. The firm’s share price has risen by 13% since October, and its prospective yield of 6.0% places it firmly in the premier league for income.

I didn’t choose to buy into to the IPO, but now that the dust has settled, I’ve taken a closer look at the firm’s financials, and I reckon that Direct Line remains a very appealing buy.

It’s cheap

Direct Line currently trades on a price to tangible book ratio (P/TB) of just 1.35, which should limit the potential downside to the firm’s shares, since 157p of Direct Line’s current 212p share price is backed by cash and other assets.

In comparison, Aviva, Legal & General and RSA Insurance all have a P/TB ratio of around 2.2, while motor insurance specialist Admiral trades on a P/TB of more than 8, thanks to its reinsurance-based business model.

It’s profitable

Direct Line’s operating margin was 11.5% during the first half of 2013 — more than double the 5.4% it managed during the first half of 2012, and nearly twice its 2012 full-year operating margin of 6.6%.

Last year’s performance was impacted by claims from major weather events, and while I don’t expect that Direct Line will maintain its first-half performance for the remainder of the year, a substantial increase on last year’s operating profit seems very likely.

Enjoy the income

Direct Line paid an 8p final dividend last year and has declared a 4p interim dividend in the current year, giving a trailing yield of 5.7%.

Analysts expect the total payout to rise to 12.7p this year, giving a 6.0% prospective yield. This is much higher than that offered by peers such as Aviva (3.8%) and RSA (5.4%), and while Admiral’s 7.4% yield is higher, more than half of this is paid as a special dividend.

Finally, I reckon that Direct Line’s high yield could help its share price, too, as income-seeking investors may buy into the stock, driving up the share price until the yield falls. Direct Line’s share price is currently down from its 238p peak at 212p, which looks like it could be an attractive entry point to me.

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> Roland owns shares in Aviva but does not own shares in any of the other companies mentioned in this article.