Direct Line (LON: DLG): Should income investors buy this FTSE 250 stock?

Highlights

  • UK markets rose in early trading despite weak UK retail sales data report.
  • The FTSE 250 index was trading higher by 0.50 per cent at 23,751.08.
  • Insurance firm Direct Line, an FTSE 250 stock, reported a 39.6 per cent increase in its H1 2021 operating profit.

The major FTSE indices were trading in the green today despite the UK reporting a fall in retail sales for the fourth month in a row, sparking concerns that the UK central bank, Bank of England, may raise interest rates.

According to the Office for National Statistics, UK’s retail sales fell by 0.9 per cent in August compared to a drop of 2.8 per cent in July, facing a severe challenge in the supply chain.

The blue-chip FTSE 100 index has lost its momentum midday today, though the mid-cap FTSE 250 index touched today’s session highs of 23,759.06 and was still up by 0.50 per cent, trading at 23,751.08 as of 12:17 PM BST.

Despite potential inflation concerns, the UK markets have largely shaken off the continuing weak retail sales data, indicating it has at least partly been priced into the market.

One FTSE 250 index stock, Direct Line Insurance Group (LON: PLC), the UK based insurance company, was buzzing today. Let us take a closer look at the investment prospect of the stock:

Direct Line Insurance Group (LON: PLC) share price performance

Direct Line’s shares were trading at GBX 304.70, up by 0.07 per cent on 17 September 2021 at 11:44 AM BST. Direct Line’s market cap was at £4,088.50 million as of 17 September 2021.

Direct Line Insurance Group share price performance

(Image Source: Refinitiv)

It’s one year forward price to earnings (P/E) ratio is at a multiple of 10.482, compared to an industry median of 13.36x, according to data from financial data research platform Refinitiv.  And its next twelve months (NTM) dividend yield is at 8.085 per cent, higher than the industry median of 5.82 per cent.

Direct Line’s H1 2021 results

The company recently reported its H1 2021 results, and its operating profit rose by 39.6

 per cent to £369.9 million from £264.9 million in H1 2020.

The rise was due to benign weather conditions, with the company not having to deal with covid-19 related travel insurance claims in H1 2021 and some other factors.

The group declared an interim dividend of 7.6 pence per share, up by 2.7 per cent from its H1 2020 dividend of 7.4 pence per share.

The group aims to achieve a 2021 operating ratio of 90 per cent to 92 per cent on a weather normalised basis due to a lower-than-normal claim frequency in Direct Line’s motor division.

Bottom Line

DLG can prove to be an interesting investment opportunity for income investors in the mid- cap segment. The stock has been underperforming for last some time, but the company holds strong growth prospect; also, the successful vaccination has ensured that the claims remain low.

Moreover, the non-life insurance sector is set to rise in the coming years, which can boost the company’s long-term growth potential. According to a recently released report by research firm Market Research Place, the global non-life insurance industry is forecasted to rise significantly between 2021 and 2027.

Direct Line is a dividend paying company, and its NTM dividend yield is much better than the industry median also, it holds a lower forward P/E than its industry median, making it a strong investment opportunity at the lower levels.

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