ii view: Direct Line paying two dividends

Covid has proved mixed for this insurer which is now back paying an attractive dividend.

First-half results to 30 June 2020

• Gross written premiums up 0.4% to £1.58 billion
• Operating profit fell by 3.4% to £265 million
• Interim dividend up 2.8% to 7.4p per share
• A special dividend of 14.4p per share

Chief executive Penny James said:

“When the Covid-19 pandemic hit, we prioritised phone lines for existing customers, created new online journeys and offered additional value through various initiatives including mileage refunds and payment deferrals. 

"We have seen just how quickly people change their behaviour and I am proud that we've been able to adapt rapidly whilst still making good progress on our strategic transformation. We still have a huge amount to do, both operationally and technically, but even in the midst of a pandemic we have made excellent progress on our technology transformation. Delivering so much change whilst over 9,000 of our people worked from home was an exceptional achievement."

ii round-up:

Car and home insurer Direct Line (LSE:DLG) announced a special dividend of 14.4p per share to replace the cancelled 2019 final payment, as reduced motor claims during the pandemic lockdown helped profits beat City forecasts.

The insurer, whose brands also include Churchill and Green Flag, raised its half-year payment by 2.8% to 7.4p per share. The industry regulator earlier in the year urged restraint on dividend payments given the uncertain economic outlook.

Direct Line shares rose by more than 5% in early UK trading and are now up over 40% since the UK went into lockdown back in late March. Shares for rival Admiral (LSE:ADM), which continued to pay a 2019 final dividend but refrained from paying a special dividend at the time, are up 21% since late March. 

Pandemic-related travel insurance and business interruption claims of £25 million and £10 million respectively were more than compensated for by reduced motoring claims as customers worked from home during the lockdown. 

Covid-19 restrictions led to a 70% reduction in claims notifications in April, which has increased each month since then but remains below normal levels. Motoring operating profit jumped by 43% to £220.5 million. 

Storms in early 2020 produced a halving in home operating profit to £35.3 million. Overall policies in force reduced by 1.7% year-over-year given reduced partnership volumes. 

The near-4% fall in total group operating profit to £265 million beat City expectations for a fall down to around £240 million. 

Direct Line under its relatively new chief executive is overhauling its platform technology. Rollouts for both Direct Line and Churchill are expected before the end of 2020. 

ii view:

The group’s brand name remains high profile. Its markets, particularly its core motor insurance business, continue to prove highly competitive. German insurer Allianz (XETRA:ALV) added to its UK insurance operations earlier this year.  

The relatively new chief executive previously outlined six strategic objectives. The first three are aimed at making its products easy to use and available everywhere. The second three under technical edge, nimble and cost efficient and great people, are designed to help deliver great value and an excellent customer experience. Targets include improving the company’s operating expense ratio to 20% by the end of 2023, down from over 24% in early 2019.

For investors, dividends were previously a reason to buy the shares and are now back as a key shareholder attraction. Today’s announced dividends alone offer a yield of over 6% at a share price of 334p - generous in today’s ultra-low interest rate environment. In all, while unexpected events such as the weather can threaten shareholder returns, income seekers may wish to take a look. 

Positives: 

• Diverse product offering 
• Attractive dividend payment (not guaranteed)

Negatives:

• Car insurance market highly competitive
• Factors outside of its control such as the weather influence performance

The average rating of stock market analysts:

Strong buy