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Direct Line is a belting dividend play
UK motor insurance companies have under-performed the wider FTSE 100 by about 15% since the third quarter of 2017.
While this negative sentiment may worry many investors, we think a constituent of this space Direct Line (DLG) is worth a closer look thanks to the income on offer and the competitive advantage derived from its strong portfolio of brands.
The company’s recent first quarter results led to an intra-day fall of 4% in its share price. However, although its premium income was down 5% on the prior year, largely due to exiting partnerships with Nationwide and Sainsbury’s, there was nothing sinister in the update.
Direct Line’s management has made no changes to its guidance, instead reiterating full year targets. The 5% growth in its higher margin own brand insurance policies suggests there is no danger of any dividend changes as was seen following the Ogden discount rate change in February last year.
That change impacted Direct Line’s 2016 results, when it revealed its profit took a £217m hit and no special dividends were paid.
In September last year, it was proposed the Ogden rate be moved to between zero and 1%. The company subsequently beat market predictions with its 2017 results, keeping shareholders happy with a bumper dividend payout of 35.4p per share including special dividends.
A spokesperson for Direct Line says that 2017 was an ‘exceptional’ year and allowed the company to ‘rebase’ its regular dividend upwards.
If the company could match that payout for this year, Direct Line would be on a prospective dividend yield of more than 10%.
This may be too big an ask but even based on the 29.74p forecast total dividends for 2018 from investment bank UBS, Direct Line yields 8.1%.
IS THE DIVIDEND SUSTAINABLE?
According to research by UBS analysts, Direct Line is well placed to push through premium increases as the company has less exposure to price comparison websites.
UBS also notes Direct Line can maintain a better margin than other insurers due to the strength of its brands.
The company has some of the most recognisable brands in the UK for personal motor and home insurance including Churchill as well as Privilege and Green Flag.
This is good news as higher premiums should result in more cash flow and therefore more security over the company’s dividend.