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 first quarter saw a “Good start” to 2015. Gross written premiums for ongoing operations declined by 0.9%.
  • For its Motor portfolio, overall risk-adjusted prices increased by 3.6% compared with Q1 last year, whilst the Home division experienced modest reductions in in-force policies and gross written premium across the quarter. Rescue and other personal lines experienced strong gross written premium growth of 8.1% year over year despite a headline reduction in in-force policies since 31 March 2014
  • The Group’s investment in digital continued with the roll out of a new quote and buy journey for its home insurance products made. As previously announced, the sale of its International division is expected to complete in the second quarter. On completion of the sale, management expects to announce a special dividend reflecting substantially all of the net proceeds of the sale, conditional on shareholder approval of a share consolidation. 
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? 


0 Comments

  • Anonymous

    Reply Reply 14th May 2015

    Like you, I'm a customer and a fan of Direct Line. Unlike you, I usually take the renewal quote, but I realise I'm a complete mug.

    However, I have struggled with Direct Line as a business; it's proposition is 'going direct' but these days all insurers are direct (online only). Direct Line refuses (I think?) to use comparison services e.g. MoneySupermarket, which leaves it instead paying big bucks for Mr Wolf. This feels like an attempt to bludgeon us via branding into believing they offer a better deal (which they used to, when being Direct was innovative); if they were genuinely the best offer they would be on MoneySupermarket. I think their strategy isn't coherent/competitive, and don't like investing in businesses where this is the case.

    @UKinvestorgeek

  • Good purchase. The insurers of all kinds are solid dividend payers. I do hope that you also get your money back over the next 2.5 years!

    Cheers

  • Huw Davies

    Reply Reply 14th May 2015

    Hi M,

    I've had very good experiences with them so far too. I hope this is another long term high income provider. I would happily take my money back in 10 years! 🙂

    Cheers
    Huw

  • Huw Davies

    Reply Reply 14th May 2015

    Hi UIG,

    Thanks for stopping by and sharing your views.

    I've been a relatively happy customer with my experience with DLG so far. That to me in insurance means minimal contact, good cover, cheap rates, and low faff. I never take a renewal quote at face value. I'll always check to see if new customers are getting a better deal.

    Unlike yourself, I like the way they stand away from other companies and don't join the comparison websites. To me it displays confidence, and they still maintain a strong position in the market place. They're making the consumer work to go with them, and they're results would suggest it works. They have one of the strongest brands in the insurance in the UK, and brands are hugely powerful.

    I can only speak for myself, but for us they do offer lower rates and better cover than 99% of the providers I check, but I'm aware everyone's circumstances are different.

    I always appreciate people sharing their opinion, whether it supports mine or not. Debates/Discussions are healthy!

    Thanks again for taking the time to share yours. Have a great week!

    Huw

  • Dividend Drive

    Reply Reply 16th May 2015

    The insurance sector is looking pretty solid at the moment. That being said, I have no exposure whatsoever to car insurance companies currently. All of the insurance sector is highly competitive but car insurance in particular seems pretty brutal so until I have had time to properly look into it generally I am holding off! I do have a couple of speciality insurers (obviously, like you, minus Catlin Group now) and life insurers though. Great long term investments. I am sure that DLG is also!

    Good luck with it!

    PS: On the Catlin Group front. I assume you ended up having to accept some XL shares as well instead of fully cash? I hope yours was not so small it hardly seemed worthwhile holding onto it!

  • Reading your analysis just makes me want to get involved with the div investing thing, go out and buy the same shares!
    4.4% sounds pretty awesome and then you have the cap gains as well which is crazy.
    I know they can't all be like that and future performance could be a lot worse but still… very tempting 🙂
    My only issue would be if you stopped posting for whatever reason I would not have a clue what to do in future. I guess I'd have to learn how to evaluate companies, prices and value on my own 🙂

  • Huw Davies

    Reply Reply 19th May 2015

    Hi D2,

    The defensive nature of insurance has pulled me in once again. DLG is not limited to car insurance as it sells home, rescue and other personal lines, commercial and international. But car insurance is one of it's largest parts, and you're right, it is highly competitive.

    Thank you for the well wishes. I also hope it turns out to be a good one!

    Yes, I was a bit surprised to see XL shares in my account. At first I thought it was a temporary thing, but I've been messaged about it, confirmed that I know own 5 shares in them. Mine is worth a touch over £100, and they pay a 1.7% dividend. H&L charge £11.95 per trade + stamp duty so it'll cost me a significant percentage to sell them and use the money to trade again (over 25% of it). I'm going to keep it for now and largely ignore it. How about you?

    Thanks again for stopping by!
    Huw

  • Huw Davies

    Reply Reply 19th May 2015

    Hi TFS,

    I don't know if that's a good thing or a bad thing. I'll take the compliment though!

    4.4% is recent, and could adjust. It is a solid return in any case. I must confess that I was sold into Dividend Growth Investing early on. I bought a couple of shares, at the same time I bought trackers, and income funds. I enjoy the analysis process and especially the income. One thing I love about shares is just buying them and leaving them. There's an initial charge, and after that point there's no annual account fee or commission, it's done. If you select the right companies I believe you can produce a higher income than the FTSE 100 or All share trackers, and with multiple buys, you can spread the risk over time. That's my plan anyway.

    I would recommend NOT following what companies I choose, but learn how I AND others value companies so you can select them yourself. You don't want to be investing money without knowing what you're doing.

    I'm happy to answer any questions you have on the topic to the best of my ability though!

    Cheers
    Huw

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