Stock Purchase: Direct Line Group

Image result for direct line group
On Wednesday 6th May, I invested £1,262 (including commission and tax) in Winston Wolf 'The Fixer' or Direct Line Group (same thing) but do they have my back? The share price at the time of purchase was 317.45p. I now own 394 shares. 

The company floated on the stock market in October 2012, and had you invested in them at this point, you'd be siting on a very healthy profit. The share price opened at 181p per share. From capital gains alone your money would be worth 75% more today. 

They've paid their shareholders 55.80p a share since inception, which is a 30% ROI from dividends alone. If you combine the two, your total return in 2.5 years would be 106%

DLG's average dividend yield over the 2.5 years has been 4.4%. This figure does not take into consideration the special dividend it's been paying. Like my two other Non-life insurance investments - Admiral and Amlin, the special dividend is substantial. From the 20.60p they paid their shareholders in 2013, 8p were special dividends. From the 27.20p it paid in 2014, 14p were special dividends. 

Dividends in their own right aren't ever guaranteed to shareholders. Special dividends are even less likely to remain in place. I base my decision on the dividend yield without the special dividend contribution, and think of the special dividends as a nice unexpected bonus. DLG fits the bill for me with an average 4.4% yield. I'm primarily interested in companies that pay more than 3.5%. 

From 2013 to 2014, the dividend (excluding specials) grew 4.76%. If you include the special dividends, the growth was 32%

Their dividend cover averaged 2.22 over their time on the LSE, and the dividend was covered 1.95 times in the most recent financial year. I look for companies that can cover their dividend by at least 1.5. 

The companies P/E ratio currently sits at 12.57, which is comfortably below the 20 I'm interested in. 

DLG are my third and final investment into the Non-Life insurance sector. To reduce the volatility and risk of my portfolio, I plan on investing in 2 to 3 companies within each sector. 

Past Performance Doesn't Guarantee Future Returns

Just because investors got their money back in 2.5 years with DLG, doesn't mean the same return will happen again. I would suggest that this level of return is highly unlikely actually. 

What does the future hold for DLG? The interim Management Statement was released on the day I bought the shares (6th May). 

Information taken from H&L website:
The Chief Executive commented:
"We continued to invest in technical and digital capabilities to improve our customer propositions and satisfaction, whilst maintaining our focus on efficiency. This progress in the first quarter gives us confidence that we are well positioned to meet our 2015 financial objectives."

It's not all good news

DLG's adjusted earnings per share has increased from 21.80p to 25.71 in 2.5 years, and their dividends have increased to a higher degree (as mentioned above). However, revenues are down. In 2012, Their revenue in (millions) was £4,048 in 2012, £3,317 in 2013, and £3,144 in 2014. 

This is a concern, and there's no doubt the online insurers and comparison sites have taken their toll on the business. 

Fortunately, the companies profit after tax and from continuing operations has looked much more encouraging. In 2012, it was £184.30 (in millions), £310.80 in 2013, and £359.30 in 2014. 

I look for companies with consistent growth in revenue, earnings per share, and dividends over time. There aren't many companies that consistently deliver on all three, but Direct Line's results are good enough for me. 

A Direct Line Customer

I've been a customer of Direct Line for my car insurance since I started driving. I continue to shop around for the best offering every year, but DLG has consistently offered the best cover for the lowest price. Lou and I also use them for our home insurance for the same reason. 
As we're a customer on two forms of insurance we're able to lower our overall cost on each, which is largely why the price is low. We're not tied into using them, and I have no problem using another insurance company if they offer a better rate in future. 
We've never taken them up on a renewal quote to date, and we've been lucky to get quotes on offers for new customers on numerous occasions - Eg. 30% off or 10 months for the price of 12. 

My decision to invest in Direct Line has nothing to do with being a customer, but I've been interested in their performance for the last 18 months as I've been doing Dividend Investing. As the company were new to the LSE back then, I wanted to wait and see how they perform over a longer period before making my decision. I didn't think I would invest in them this early on, but I'm ultimately looking for long term consistent income generators, and I believe DLG offer that.

DLG have started well in 2015, and an upcoming special dividend is on the cards (although not guaranteed) due to the sale of it's international operations in Italy and Germany. I'm hoping that I can receive consistently rising 4.4% dividends for 10-30 years. 

What do you think of Direct Line as an investment option? Are you comfortable investing in a company that's floated for less than 5 years in the LSE? 

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