Why Are Direct Line Shares Cheap?

James Gard: Each week we look at one stock that is cheap or expensive and why. This week’s it’s the turn of Direct Line Insurance, which has a rare 5-star rating from Morningstar.

Direct Line disrupted the personal insurance industry when it launched in 1985, offering cheaper car cover by cutting out the middleman and screening memorable TV adverts featured talking red telephones on wheels. Now we’re in the era of comparison sites and quotes driven by artificial intelligence, but Direct Line has defended its market share. It’s done this by being very selective in picking policyholders, says Morningstar analyst Henry Heathfield, preferring quality (and lower risk) customers rather than chasing more customers. Direct Line floated in 2012 when it was spun out of Royal Bank of Scotland. Shares were priced at 175p then and it’s been a bumpy ride since, with some volatile periods along the way. The company has a fair value of 395p but shares trade around 270p after a fall of 16% this year.

Insurance companies are not the most exciting shares for growth investors, but Direct Line may appeal to those with an income focus. Heathfield says that Direct Line pays up to 400 million pounds to shareholders a year, and with special dividends and buybacks combined, the shares yield nearly 10%. Capital allocation continues to be exceptional, he says.

For Morningstar, I’m James Gard


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