As I see it, the deal could generate real value for Aviva’s shareholders. So should I reconsider my previous aversion to the stock?

A quick insurance overview

Insurance firms make money in two ways. One is keeping the claims they pay out below the premiums they collect and the other is by investing those premiums to earn a return before paying them out.

Different insurers take different strategies. Admiral, for example, focuses on underwriting profit and Berkshire Hathaway leans more on its investments. 

Intrinsically, neither is better than the other. But a good insurance business needs to have a strong competence in at least one of these areas. 

Prioritising both is hard – a strong investment firm should want to bring in as much cash from policies as possible, even at lower underwriting margins. With that in mind, let’s turn to Direct Line and Aviva.

Joining forces

The reason I’ve stayed well away from Direct Line over the past couple of years is its underwriting (its main profit engine) has been disappointing. It made a loss in 2023 before scraping back to profit in 2024.

There are two ways for this to improve. The first is pricing its policies more efficiently and the second is cutting back on its costs – and it’s been making moves towards doing both. 

Joining forces with Aviva should help with both parts of this. Most obviously, the combined business won’t need two sets of staff doing the same job, so there should be additional cost savings available. 

Aviva has also fared much better with underwriting over the last couple of years. So there’s reason to think there could be improvements on this front as well.

Why I’ve never bought Aviva shares

Aviva shares have a 7.5% dividend yield, which is very attractive. But there are two reasons I’ve never bought the stock in the past.

One is slightly ironic – I think the firm’s risks are extremely difficult to assess. Insurers in general find out at the start of a policy what its maximum profit is and only later what its liabilities might be.

This is especially true of life insurance, which makes up a significant part of Aviva’s revenues. But this isn’t the only source of uncertainty I have. 

Aviva’s profits have fluctuated depending on things like inflation and interest rates. While this isn’t unusual, there have been years when these have been below the dividend and this creates a risk. 

Foolish takeaway

I’ve never had any interest in buying Direct Line shares, but I think I can see why Aviva has. The insurance giant has far more capacity to improve the business than I do. 

Acquiring Direct Line at a 22% discount to where the stock was five years ago looks like a smart move. But it doesn’t put me any closer to wanting to buy Aviva shares.

The post Does acquiring Direct Line make Aviva shares a buy? appeared first on The Motley Fool UK.

With Aviva looking undervalued, I’d even been wondering if someone might make a takeover offer. But then Aviva turned the tables and approached Direct Line Insurance Group (LSE: DLG).

On 23 December, we heard that the boards of the two companies have reached an agreement for a recommended cash and share offer for Aviva to buy out Direct Line.

No change yet

The early market reaction saw barely any movement for the Aviva share price, but Direct Line rose another 3% in early trading.

That really just cements the recent trend, with Direct Line shares up 58% since news of the talks first broke on 27 November.

The final terms of the agreement mean Direct Line shareholders will receive 0.2867 new Aviva shares, as well as 129.7p in cash, plus “up to 5% in the form of dividend payments” for each share.

The details are subject to board and shareholder approval. But the announcement says the Direct Line board intends “to recommend unanimously that Direct Line shareholders vote” to accept.

Direct Line gains

Aviva reckons the deal values Direct Line shares at 275p, 10% above the market price as I write. And it’s a 73% premium to the closing price on 27 November.

It looks like a cracking Christmas present for Direct Line shareholders. The bosses of both companies, naturally, are brimming over with enthusiasm.

I’ve even thought of buying some Direct Line shares a few times, despite its modest dividends. But it had been struggling, in a highly competitive insurance market blighted by inflation and adverse weather.

Still, the shares were on what I thought was an undemanding price-to-earnings (P/E) valuation based on forecasts for an earnings recovery. At least, before the Aviva boost.

Cash vs dilution

But as an Aviva shareholder, I really have to wonder if we’re getting a good deal here.

The Direct Line board did reject Aviva’s earlier approach, calling it “highly opportunistic“. It clearly wasn’t going down without a fight if it didn’t see enough cash on the table. So this final offer at least avoided a drawn-out hostile takeover battle.

Aviva completed a £300m buyback of its own shares in June 2024. And now it’s issuing new shares to pay, in part, for the takeover.

We have some dilution to get our heads round here, and broker forecasts will surely be up in the air for a while.

What next for dividends?

Almost as if to head off dilution concerns, Aviva said it “intends to declare a mid-single-digit percentage uplift in the dividend per share following completion.”

And the board “further intends to maintain the current guidance of mid-single digit growth in the cash cost of the dividend from this rebased level.“

For me, investing for long-term dividends, I think that’s enough to keep me on board. But I suspect concerns over the takeover price could mean further Aviva share price weakness.

The post Can this takeover news give Aviva shares the boost we’ve been waiting for? appeared first on The Motley Fool UK.

Aviva, the UK’s largest insurance group, will acquire Direct Line’s business in a cash and stock offer worth 275p per share. On Friday, the share rose accordingly, pushing towards the proposed acquisition price.

The takeover saga

Direct Line’s management had rejected Aviva’s first offer and described it as “highly opportunistic”, noting that they were confident in the company’s ability to thrive on its own.

However, Aviva’s persistence paid off with an improved bid, valuing Direct Line at £3.6bn. The 275p figure represents a significant 73.3% premium over Direct Line’s pre-bid share price.

The deal, if finalised, would create a formidable insurance giant in the UK market. Despite accepting the offer, Direct Line’s board maintains confidence in its standalone prospects and the capabilities of its leadership team.

This potential takeover comes after a turbulent period for Direct Line, marked by profit warnings and leadership changes, making the timing of Aviva’s bid particularly strategic.

I’d held the stock around two years ago, but the business started to falter and the sizeable dividend yield became unsustainable. Essentially, it was a bad pick in a sector that hasn’t performed overly well in a higher interest rate environment. I sold some time ago.

What happens now?

Now that Direct Line’s management has indicated its willingness to accept Aviva’s improved offer, the FTSE 100 insurer must formalise its offer by Christmas Day, as per City takeover rules.

If Aviva proceeds, the deal will face scrutiny from regulatory bodies, including the competition watchdog and the Bank of England’s insurance supervisors due to the significant market share the combined entity would hold in motor and home insurance sectors.

Shareholders of both companies will need to vote on the proposal. If approved, the integration process will begin, likely resulting in significant synergies but also potential job cuts beyond the 550 already planned by Direct Line.

The leadership team, including CEO Adam Winslow, who recently joined from Aviva, will likely play an important role in managing the transition and implementing the combined strategy.

What does this mean for investors?

The Direct Line share price is currently trading at a modest discount to the proposed takeover price, suggesting there’s little opportunity for investors to buy today and benefit.

And there’s the possibility that the deal could collapse for several reasons — hence the discount to the proposed takeover price. That would likely result in the share price collapsing from the current elevated levels.

For context, the stock was trading as low as 147p just a few weeks ago. It’s not unrealistic to imagine the stock falling back there if Aviva turns away from the deal or the regulator takes concern with the takeover.

The post What’s going on with the Direct Line share price? appeared first on The Motley Fool UK.

Show me the money!

Let’s start with what we know. The potential suitor is none other than FTSE 100 insurance juggernaut Aviva (LSE: AV). On 19 November, it made a non-binding cash and shares offer that valued the company at £3.3bn — a huge premium on the Direct Line share price at the time.

Sounds pretty great, right? Well, it turns out that offer was spurned by Direct Line’s board and labelled it as “highly opportunistic“. Funnily enough, this isn’t dissimilar to what was said earlier in the year when management rejected a £3.17bn approach from Belgian rival Ageas.

Prior to yesterday’s news, I suspect a lot of investors were wishing the earlier deal had gone through. Trading-wise, the owner of the Churchill brand has been having a torrid time. Factors such as inflation, poor weather and intense competition have been blamed. Only a few weeks ago, the company declared that it would be cutting 550 jobs to save costs.

Grab the popcorn

Whether yesterday’s incredible gain holds over the next few days will be fascinating to see. On the one hand, it doesn’t look like Aviva’s ready to give up its pursuit. Indeed, the Financial Times reported yesterday evening that the £13bn-cap has now contacted Direct Line’s investors directly.

If it can drum up enough support, it might not matter what new(ish) CEO — and former Aviva man — Adam Winslow and his team think. A hostile takeover might be on the cards.

Of course, I wouldn’t blame holders for secretly hoping that another rival might be tempted to enter the fray. A bidding war would surely generate an even bigger return.

No guarantees

On the other hand, the stock market’s littered with examples of share prices falling back after takeover talk stalls.

As an example, shares in property portal Rightmove recently jumped when a takeover approach from the Rupert Murdoch-backed real estate company REA Group was made public. Four rejected bids later, REA Group backed out for good.

Sure, Rightmove stock’s higher now than it was before the announcement. But it’s also yet to return to the heights seen in September.

If Ageas walked away from Direct Line, there’s a possibility that Aviva will do the same.

More bids to come?

Regardless of what happens next, I suspect many holders are feeling a lot happier about things as they sip their morning coffee. Stick or twist? There are worse problems to have.

I would never buy a company’s shares just in the hope that it will be snapped up by an admirer. However, this development does show that taking a contrarian stance has the potential to be (very) lucrative. I’d be looking at a gain of around 60% had I picked up this value stock when it sank back to a multi-year low in summer 2023!

With the UK market still looking cheap, I’m sure Direct Line isn’t the only company someone’s running the rule over.

The post Direct Line shares rocketed 41% yesterday! What now? appeared first on The Motley Fool UK.

When I see a blue-chip company that has a P/E ratio in single digits, it can grab my attention. But that is only one valuation metric, so as an investor it is important to take a rounded view of a company’s valuation.

Earnings are inconsistent

For starters, what is that P/E ratio based on?

Last year, Aviva’s basic earnings per share came in at 37.7p. But the prior year, the company recorded negative basic earnings per share of -34.7p. The year before that had been positive, but at 5.85p, it was far below what was achieved last year. Clearly, earnings at Aviva can move around significantly, meaning the P/E ratio may be a less useful valuation tool here than it can be for some other companies.

As an insurance company, differences in underwriting results from one year to the next can impact earnings. For example, there might be an unusually damaging storm. Additionally, changes in the value of investments an insurance company holds can also affect profitability in any given year.

Over the long run, though, I am optimistic about the commercial outlook for Aviva. Demand for insurance is likely to remain high, its brands are well known, it has a customer base approaching 20m (almost 5m British customers hold multiple policies with the firm) and an increased focus on core markets in recent years has helped streamline the formerly sprawling business.

Lots to like, but also some risks

The business is still unwieldy but it is a powerful money making machine. In the first half of this year, for example, it made an operating profit of £875m. General insurance premiums in the six-month period topped £6bn.

Aviva cut its dividend a few years ago but has since been growing it again.

The interim payout grew by 7%. The dividend yield now stands at 7.4%, which for a blue-chip FTSE 100 business such as this one, I find attractive.

Insurance is a difficult business, though, and there are always risks, as rival Direct Line’s very mixed performance in the past few years has demonstrated.

Premium pricing has moved around a lot in the UK and Ireland in recent years. That has worked to underwriters’ advantage, but I also see scope for movement in a downwards direction, if one firm tries to win business by competing more aggressively on price. Given the importance of the UK market to Aviva’s overall performance, I see that as a risk to the firm.

But I think investors should consider acting on the current Aviva share price. I think it represents good value for a firm with a long growth runway, proven business model, generous dividend, and focussed business strategy.

The post With a P/E ratio of 9, is the Aviva share price a bargain? appeared first on The Motley Fool UK.

A shock profit warning revealed that the business was struggling more than the City had realised. It axed the dividend.

But the business has a customer base in the millions, a well-known brand, and operates in a market that should see resilient long-term demand.

It reinstated its dividend this year. For now though, it remains a shadow of its former self. Could things get better in future?

A common investing mistake

One mistake that a lot of investors make is paying too much attention to how a company has done in the past as a basis for estimating what it may be capable of achieving in the future.

Looking at the past Direct Line dividend, the current share price could seem like a bargain. If the company paid out the same dividends (both ordinary and special) next year that it did for 2020, its prospective dividend yield would be a mouth-watering 17.5%. That would certainly grab my attention!

But just because the business did that well in the past does not mean it will do so again.

Direct Line has seen significant changes in senior leadership since the start of last year. That could help improve performance, but it also brings a risk of internal disruption to the business as any management change does.

Weak business performance

Even more alarming for me as an investor is the source of last year’s profit warning. Basically Direct Line pointed the finger for its poor performance at events such as unusually bad storms pushing up the cost of claims.

But exceptional events are unexceptional in the business of insurance. Estimating risks and pricing them properly is the bread and butter of a general insurer such as Direct Line.

Its rivals faced the same conditions last year but did not seem to trip up in the same way. That makes me concerned about how tight Direct Line’s underwriting standards have been over the past few years and whether that could lead to any more nasty surprises in future.

Room for dividend growth

On the positive side, the dividend is back and I think there is substantial room for future growth.

At 4p per share, it is less than a third of what it had been two years before. But the company has a sizeable business – revenues last year came in at a record £3.6bn.

If it can convert revenue growth to earnings growth, there could be scope for a bigger dividend in future.

The first quarter of this year saw year-on-year percentage revenue growth in double digits. That is good, but reflects higher pricing rather than business growth: the number of policies in force fell 2% from the same quarter a year ago.

The Direct Line dividend may yet scale its old heights. But if it ever does, I do not expect it to happen for a long time. The business performance simply could not sustain such a high payout at the moment, in my view. I have no plans to buy the shares.

The post Will the once massive Direct Line dividend ever get back to its old size? appeared first on The Motley Fool UK.

The question is more serious than it sounds.

A lot of people lose sleep over their investments. It does not have to be that way.

As billionaire Warren Buffett says, “when forced to choose, I will not trade even a night’s sleep for the chance of extra profits”.

Why shares can lead to sleepless nights

There are a few reasons why shares might keep someone up at night.

Sometimes a share is heading ever lower and it looks like it might end up going to zero if things do not get better.

Taking a big loss can be psychologically unsettling, but financially still not as bad as losing one’s entire investment.

Indeed, at the moment I am wondering whether my Superdry shares will recover or whether I ought to sell them now for pennies while I can.

Another concern can be that a company will need to raise more cash and so decide to issue new shares. Sometimes buying them is throwing good money after bad (if one even has spare money to invest at the time of such a rights issue).

But not investing reduces one’s stake in the company. Even FTSE 100 companies like Ocado have repeatedly tapped shareholders for more cash.

Dividend tap suddenly runs dry

Another concern that could keep one awake is dividend cancellation.

If an investor has a big stake in a company with a juicy dividend that suddenly cancels the payout, it can leave an unwelcome hole in personal finances.

Direct Line (LSE: DLG) did that just last year.

Even worse, such a surprise cut can often lead to the share price falling (the Direct Line share price fell 18% last year).

So selling after a dividend cut might lock in a paper loss on the shares’ worth. But holding in the hope of price recovery can tie up funds for years or decades, potentially earning zero dividend income along the way.

Figuring out what to do

How could I try to minimise the risk of trading a good night’s sleep for profits, as Buffett says?

One simple move is finding a diverse range of shares to buy.

Spreading the risk means that any one share badly underperforming my expectations will have a limited impact on my overall portfolio performance.

I think looking out for warning signs can help too, whether when finding new shares to buy or revisiting the investment case for an existing shareholding.

When I looked at Direct Line’s high yield in 2022 and then watched it get higher, reaching the mid teens, I wondered what was going on.

Was this an incredible high yield bargain, benefiting from a large customer base and iconic brand? Or was the yield a warning bell that other investors feared exactly what ended up happening – a dividend cancellation?

Simply by diversifying my portfolio adequately, ruthlessly focusing on high quality at an attractive price when finding shares to buy, and listening out for warning bells about an investment case, I think I can build a portfolio that lets me sleep soundly at night.

The post Finding shares to buy for a good night’s sleep! appeared first on The Motley Fool UK.

Direct Line’s ups and downs

In December 2015 and August 2017, Direct Line stock peaked above £4. Alas, the shares have been nowhere near this high since. For shareholders, it’s been a long, sustained loss of value.

Currently, the Direct Line Insurance Group share price stands at 186.9p, valuing this business at £2.5bn. This is a long way from when the firm was in the elite FTSE 100 index.

Here’s how this stock has performed over six timescales:

Over six months, the Direct Line Insurance Group share price has risen by nearly 16%, beating a 6% rise from the Footsie. It’s also leapt by more than a fifth over 12 months.

However, the big disappointment is that this stock has almost halved over the past half-decade, whereas the FTSE 100 has gained 6.1%.

The takeover makeover

For the record, my wife and I are Direct Line shareholders, paying 200.3p a share in June 2022. To date, we are sitting on a 6.7% paper loss from this purchase.

However, the Direct Line Insurance Group share price has been far higher in 2024. After Belgian insurer Ageas made an offer to buy the business, the shares exploded on 28 February.

As is usual in mergers and acquisitions, Direct Line’s directors rejected this initial approach. Ageas duly returned with a larger cash element in its second offer. This too was rebuffed, at which point the Belgian firm walked away.

At their 2024 peak, the shares hit 240.10p on 13 March. They have since fallen back 22.2% from this spike. Only time will tell whether Direct Line’s directors did the right thing by batting away these bids.

What next for the stock?

Lacking a crystal ball, I’m unable to predict the future price movements of this or other shares. Still, it looks like Direct Line has turned the corner from 2023’s lows, when the stock bottomed out at 132.11p on 7 July.

Thanks to soaring repair costs, UK insurers have taken a beating since 2022. But big hikes in insurance premiums are restoring profitability and rebuilding battered balance sheets. Also, Direct Line has sold off a couple of non-core businesses in order to generate extra cash.

One positive is that the firm has reinstated its dividend, albeit at a much lower level than before. Indeed, on Thursday (4 April), the shares went ex-dividend for a payout of 4p a share. However, previous payments of 7.6p for 2022, 22.7p for 2021, and 36.5p for 2020 are long gone.

Having bought this stock for its dividend stream, I’m hopeful that payouts will rise in the coming years, as the trailing yield is just 2.1% a year. That said, the group’s revenues, profits, and cash flow could suffer if we have another harsh winter like that of 2022/23.

Even so, I’m hopeful that the Direct Line Insurance Group share price will be well above current levels by end-2025!

The post Down 22% from its 2024 high, what next for the Direct Line Insurance Group share price? appeared first on The Motley Fool UK.

This month, I’ve spotted three shares I think could do well in 2024. These aren’t in my portfolio yet but they’re strong contenders for the next buying round.

They are Greggs (LSE:GRG), Greencoat UK Wind (LSE:UKW) and Direct Line (LSE:DLG).

Getting a piece of the pie

Popular high-street chain Greggs is often considered the UK’s favourite bakery. The past year has been good for the high street chain, seeing the opening of 220 new stores. This means Greggs is on track to meet its 2026 target of doubling sales and opening its 3,000th store in the UK.

In its 2023 full-year (FY) results, Greggs revealed profit before tax of £188.3m, a 27% year-on-year increase. Although profit margins fell by 1%, revenue and net income increased by 20% and 19%, respectively. The positive results prompted the chain to reward its faithful investors with a special dividend of 40p per share.

With earnings-per-share (EPS) at £1.41 and the shares costing £28.30, Greggs’ price-to-earnings (P/E) ratio is 20.1. That’s higher than the industry average of 17.4, so the shares look expensive on paper. But at this price, I still think Greggs is cheap given its growth potential.

Growth in the wind?

Shares in the UK’s largest windfarm operator may be down 12.7% this year but the future looks bright for the green energy firm. The £3.17bn company has only been around for 12 years, expanding aggressively in that time. In 2023, it invested £821m into new infrastructure, increasing generating capacity by 397MW. It now provides 1.5% of all the country’s energy. 

However, while the 7.25% dividend yield is attractive, it has an unusually high payout ratio of 183%. This means dividend payments could be difficult for the company to cover and risk being cut, reducing overall returns. Still, Greencoat’s balance sheet looks fairly solid, with a 47% debt-to-equity (D/E) ratio and 53.8% profit margins.

In 2023, there was a 50% growth in renewable energy capacity added to global energy systems. That growth is expected to increase in 2024. I think Greencoat UK Wind is perfectly positioned to be the next big thing for green energy in the UK.

A sure thing?

With a £2.7bn market cap, Direct Line is a relatively small but well-known UK insurance firm. Recently, it’s been in the news due to an aggressive, but failed, takeover bid by Belgian insurer Ageas. Direct Line reportedly declined two ‘highly conditional’ cash-and-stock proposals, the highest of which was worth £3.2bn.

The shares surged 25% on the news to 224p before settling back to current levels around 210p.

The interest is unsurprising. Despite growing 38.3% last year, forecasters still estimate Direct Line to be trading at 45% below fair value. Furthermore, earnings are forecast to grow by 22.6% per year going forward.

However, before 2023, things weren’t as good.

Over the past eight years, Direct Line shares have lost 50% of their value, dropping from a high of 407p in December 2015. A recovery finally appears to be on the cards but it could be a while before long-term investors see profit.

But for me, Direct Line looks like a cheap FTSE 250 share that’s on the way up!

The post FTSE 250 shares: 3 cheap stocks that could take off this year appeared first on The Motley Fool UK.

Direct Line loses ground

Founded in 1985, the business has grown to be a household name in financial services, providing motor, business, life, pet, and travel insurance under various brands. Its red telephone logo is widely recognised as a British brand.

Then again, Direct Line shares have been on a rocky ride for at least the last five years. Indeed, they have lost a hefty 42.9% of their value in the past half-decade.

More recently, at their 52-week high, they peaked at 210.6p on 28 February — exactly a year ago. They then plunged, hitting their 2023 low of 132.11p on 7 July. Ouch.

However, the share price has since bounced back, closing at 163.35p on Tuesday, 27 February. This was some relief for me, as my wife and I bought this stock for 201p a share in July 2022.

The famous insurer is now a target

What led us to invest in this insurance group was its juicy cash dividends. But following heavy claims in the winter of 2022/23, the company cancelled its payout in early January 2023. Of course, this sent the stock spiralling southwards like a stone.

On Wednesday, much better news arrived for the group’s struggling shareholders. Just before noon, Belgian insurer Ageas admitted that it had made an unsolicited bid to buy the British business.

Ageas has indicated that it is willing to pay 233p per Direct Line share, made up of a mixture of cash and the Belgian company’s own shares. This values the FTSE 250 firm at £3.1bn.

This represents a tidy 42.6% premium to Direct Line’s closing price the day before. But in my long experience, boards of directors rarely accept first bids. Typically, they reject these as undervalued and demand a higher knockout price.

Hence, it seems to me unlikely that the Brussels-based group will win this battle in the first round. Meanwhile, the shares have leapt to 201.9p, a discount of 13.3% to the offer price — also typical at this stage of the takeover dance.

What’s next?

Before the market close on Tuesday, Direct Line’s directors fired back. Predictably, they rejected the “highly conditional, non-binding indicative proposal” from Ageas, which actually arrived on 19 January.

The deal — 100p in cash and one new Ageas share for every 25.24047 Direct Line Group shares — was “uncertain, unattractive…significantly undervalued the group… and also being highly opportunistic in nature”. Hence, the board duly rejected this approach.

What happens next is largely in the hands of the gods of M&A (mergers and acquisitions). But new CEO Adam Winslow will arrive on 1 March to find a very hot potato on his desk.

As a Direct Line shareholder, I’m delighted that a potential bidder has identified and partly unlocked the value hiding inside this established business. What’s more, I’m holding on tight to my stake, in hopes of a higher offer emerging!

The post Direct Line shares soar 25% on takeover bid! appeared first on The Motley Fool UK.