Direct Line Insurance Group PLC Could Help You Retire Early

Retirement may not be so long away for shareholders in Direct Line Insurance Group PLC (LON: DLG).

Peter Stephens ❯

Having held various senior management positions in the manufacturing sector, Peter founded his own manufacturing company in 1996. This was subsequently sold in 2007. Meanwhile, his passion for investing (which began during the privatisations of the 1980s) remains strong and he couples this with writing for The Motley Fool as a Contractor. His investment style is value-oriented; focusing on company fundamentals, as well as assessing the strength and presence of a competitive advantage. While above-average growth prospects remain very attractive, a greater focus on dividends has crept in since Peter became a part-time retiree in 2007.

Published 21 February, 2014 8:45 am GMT

| More on: DLG

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

With the FTSE 100 having had such a fantastic 2013, there have been various calls by investors that there is not much value left in the market.

However, one company that still seems to offer great value for money (and, as such, could help you retire early) is Direct Line (LSE: DLG).

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Indeed, it currently trades on a forward price to earnings (P/E) ratio of just 11.4. This compares favourably to both the FTSE 100 and to Direct Line’s industry group, Financials, since they trade on P/Es of 13.5 and 17.8 respectively.

That means that Direct Line currently trades on a discount to the market P/E of 15% and a discount to the Financials industry group P/E of 36%.

This may, naturally, lead many investors to question whether Direct Line is cheap for a reason — perhaps the company is of a lower quality than many of its index and sector peers, and therefore deserves to trade on a substantial discount.

However, Direct Line seems to offer a low price as well as encouraging prospects. For instance, it is forecast to increase total sales over the next couple of years by between 4% and 5%. Sure, this is hardly up there with the fastest growing companies of the index (and Financials industry group) but, when combined with improved efficiencies that are set to come through over the next two years, it means that the bottom line is expected to increase at a far faster rate than the top line.

Indeed, pre-tax profit is forecast to increase from just under £400 million in 2013 to just under £500 million in 2015. Despite this, the proportion of profits paid out as a dividend has the scope to be significantly increased, since it is expected to be just 60% in 2014, an amount that puts Direct Line on a yield of around 5.3%.

While this is better than the index yield of 3.5%, Direct Line has the scope to pay more of its profit out to shareholders and offer an even better yield. For instance, paying out two-thirds to three quarters of profits as a dividend in 2014 could increase the yield to around 6.2% (assuming the price stays the same). Such a move would be likely to prove popular with shareholders and could help to push shares higher.

Still, a yield of 5.3% remains attractive, as does a P/E that is 15% below that of the index. When allied to attractive growth prospects, all of this means that Direct Line could help you retire early.