Direct Line Insurance Group PLC’s Dividend Prospects For 2014 And Beyond

Many companies are currently offering dividends well above the interest you can get from cash or bonds — and with the potential for real future income growth

In this series of articles, I’m assessing how some of your favourite FTSE firms measure up as potential income-generators, by looking at dividends past, dividends present and dividends yet to come.

Today, it’s the turn of Direct Line Insurance Group (LSE: DLG).

Dividends past

Direct Line was spun out of Royal Bank of Scotland and floated on the stock market in October 2012. As such, the well-known car and home insurer has no long history as a dividend-paying plc.

The board announced an 8p dividend for the 2012 year, indicating that this ‘final’ dividend represented two-thirds of a pro-forma full year dividend of 12p.

Dividends present

Direct Line has so far paid an interim ordinary dividend of 4.2p for 2013, 5% up on the 2012 pro-forma interim.

In a third-quarter trading statement released during November, management said that, if trading trends continue in the final quarter, the board expects the growth in the final dividend to be at a similar level to that of the interim. Therefore, the expectation is for an 8.4p final dividend when the company announces its annual results on 26 February — that will give a 2013 full-year ordinary dividend payout of 12.6p.

However, the company also paid a windfall special dividend of 4p in December after selling its life insurance arm, and is also committed to returning to shareholders any capital that is surplus to requirements in future.

At a share price of 268p, Direct Line’s yield on the expected 2013 ordinary dividend alone is 4.7%.

Dividends yet to come

The analyst consensus for 2014 is for a dividend of 13.54p — an increase of 7.5% on the 12.6p expected 2013 payout — followed by a 9.7% increase to 14.86p in 2015. The analysts see the dividend being covered 1.7 times by earnings in both years — fair cover, as opposed to robust.

Direct Line has set its stall out as a high income payer with a progressive dividend policy for its ordinary dividend, and with the additional lure of possible special dividends from time to time. The immediate yield looks good and if the company can maintain its prominence in a competitive industry, the long-term income prospects could be good too.

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G A Chester does not own any shares mentioned in this article.