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Should You Buy Direct Line Insurance Group Today?

By Royston Wild - Apr 15, 2013 at 4:30PM

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How attractive are the shares of Direct Line Insurance Group?

LONDON -- In my opinion, Direct Line Insurance Group ( DLG 1.60% ) is a great pick for investors seeking fruitful income stocks.

The firm listed on the London Stock Exchange in October last year, after the partially nationalised Royal Bank of Scotland Group divested a chunky 34.7% stake in the insurer. The bank has subsequently cut its holding below 50% after selling a further 15.3% in mid-March.

Shares in Direct Line have failed to gain significant traction since flotation, and pressure in recent months has seen it concede 8% from late January's current high of 225 pence. However, I believe that Direct Line should begin to head meaningfully higher as earnings pick up and carry dividend yields higher.

Profitability improvements well on track
The company announced at the end of February that operating profit from continuing operations leapt 9.3% in 2012 to 461.2 million pounds.

Direct Line saw its combined operating ratio rise to 99.2% last year from 96.6% in 2011, and the firm is on the right road to achieving its 98% aim by the end of the year. The company has laid out concrete plans to deliver 100 million pounds of cost savings by the end of 2014, and is making good progress on achieving its 15% return on equity target.

Direct Line is a major player in the British car and home insurance markets, and its operations across a variety of other personal insurance products gives it diversity in the event of weakness in any one area.

These wide operations also give it stellar scope for further growth. Indeed, broker Investec has identified excellent growth potential for its travel, pet and SME operations in the UK, and further afield sees great growth opportunities in the German and Italian motor insurance sectors.

A great dividend selection
City brokers expect earnings per share to duck 12% lower in 2013, to 19 pence, before bouncing back 27% to 24 pence in the following 12-month period.

The insurer is a popular pick among investors seeking above-average dividends, and the firm is expected to hike last year's 8 pence dividend to 12.8 pence this year and then to 14.5 pence in 2014. These payments come attached with yields of 6.4% and 7.3% for these years, well above an average dividend yield of 4.8% for the U.K.'s listed non-life insurers.

Direct Line currently changes hands on a P/E readout of 10.7 and 8.5 for 2013 and 2014 respectively, offering vastly improving value prospects in relation to a forward earnings multiple of 10.3 for the complete non-life insurance sector.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Direct Line Insurance Group plc Stock Quote
Direct Line Insurance Group plc
DLG
$273.60 (1.60%) $4.30

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