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Direct Line Insurance Group PLC Could Be Worth 335p

One investment theme that came to the fore in 2013 was a shift away from defensive stocks and towards cyclical companies.

This is understandable: as growth prospects for the world (and UK) economy picked up, investors adopted a more risk-on attitude in terms of seeking out riskier companies that have the potential to deliver higher rewards.

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Such a shift makes sense after investors had sought higher yielding, more defensive companies in the wake of the credit crunch.

However, there is one company that could offer the best of both worlds. A relatively high yield and above average growth prospects seem to be in prospect at Direct Line (LSE: DLG).

Indeed, earnings per share (EPS) is forecast to grow by 8% in 2014 and by 14% in 2015, which is well above the market average of 4-7%. Of course, such gains come after what looks set to have been a challenging 2013, where EPS is set to have fallen by around 3%.

However, the growth in EPS forecast for the next two years, coupled with a very reasonable forward price to earnings (P/E) ratio of 11.7, mean that Direct Line currently trades on a price to earnings growth (PEG) ratio of just 1.06.

This is ever-so-slightly above the PEG sweet-spot of 1.0, but is just about where investors in the stock would want it to be. In other words, it offers a potent mix of good value via a relatively low P/E and yet also has promising growth prospects, too.

In addition to offering an attractive valuation and above-average growth prospects, Direct Line also offers an above-average yield. While the FTSE 100 currently has a yield of 3.4%, Direct Line offers a yield of 5.4%.

This appears to be rather anomalous: a company with above-average growth prospects and an above-average yield. Indeed, were Direct Line to trade on a lower yield as a result of its impressive growth prospects, say a yield of 4.25% (still a 25% premium to the FTSE 100 yield of 3.4%), it would mean shares trading at around 335p.

Such a share price is 26% higher than current levels and, when a yield of 5.4% is added to the mix, it shows that Direct Line seems to have considerable potential, while offering the best of both worlds: growth and income.

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Peter does not own shares in Direct Line.

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