Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

Should You Buy Direct Line Insurance Group Today?

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

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.

Bolster your investment income with the Fool
If you already hold shares in Direct Line Insurance Group, and are looking for more FTSE 100 winners to really jump start your investment income, then you should check out this brand-new and exclusive report covering a multitude of other premium payers right now.

Our "5 Dividend Winners to Retire On" wealth report highlights a selection of tasty stocks with an excellent record of providing juicy shareholder returns. Among our picks are top retail, pharmaceutical and utilities plays which we are convinced should continue to provide red-hot dividends. Click here to download the report -- it's 100% free and comes with no obligation.

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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

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

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/06/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.