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3 Spectacular Reasons That Make Direct Line Insurance Group plc A Buy

direct line

Today I am looking at why I believe Direct Line Insurance Group (LSE: DLG) is a canny investment for stock market investors.

Money comparison effect on the wane?

Make no mistake: the country’s largest motor insurers have come under sustained pressure from the steady fall in the cost of insurance premiums. The surging popularity of price comparison websites has been a key factor behind this, and the Association of British Insurers noted last month that the average premium slid almost 9% during 2013 to £374.

However, recent reports suggesting that the negative effect of such websites on Britain’s insurers is now starting to peter out was confirmed by the institution’s latest figures. Indeed, these actually showed the average premium tick 1.4% higher during October-December from the previous three-month period, to £370 from £365.

Fingers in many pies

Direct Line’s extensive operations across many niches also gives it terrific strength in diversity, insulating it against weakness in any one market. The company is a major player in the British home and motor insurance segments — areas responsible for 39% and 26% of total gross written premiums respectively — with the remainder spread evenly across its commercial, international and other product lines.

Much has been made of the effect of recent extreme weather conditions in the UK on the bottom line of the likes of Direct Line. However, Deloitte estimates that — should heavy rain persist for another few weeks — the total cost is likely to register at around £1bn, BBC News reports, well below that of the final bill when storms lashed the country seven years ago.

A prime selection for plump payouts

Direct Line is expected to supercharge 2012’s 8p per share maiden dividend to 15.2p in 2013, according to City forecasts, results for which are due on Wednesday, February 26. This projection leaves the company with a yield of 5.8%, smashing the FTSE 250 forward average of 2.8% and outstripping a corresponding reading of 4.1% for the complete non-life insurance sector.

Analysts expect the firm to rein in the payout slightly next year — a dividend of 13.7p is widely anticipated — although an uptick to 14.8p is pencilled in for 2015. Even though these predicted payments come in below 2013 levels, these still create lofty yields of 5.3% and 5.7% respectively.

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> Royston does not own shares in Direct Line Insurance Group.