One FTSE 100 stock I currently like the look of is Direct Line Group (LSE:DLG). The Direct Line share price has been on a downward trajectory for some time now. However, I see longer-term value in what I believe to be a great business. Let’s take a closer look at it.
Insurance provider
As a quick reminder, Direct Line is an insurance company specialising in personal insurance products such as car, home, travel, life, and pet. It also provides insurance to SMEs. Operating under many brands, it also has extensive partnerships with many other financial organisations too.
So what’s happening with the Direct Line share price currently? Well, as I write, the shares are trading for 181p. At this time last year, the stock was trading for 262p. This is a decline of 30%. Since the first week of September, it has lost nearly 16% in value. This is due to the recent change in government, volatility here in the UK economy, and the recent, ill-fated mini-budget announced last week.
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Short-term challenges to note
Despite my bullish attitude towards Direct Line, it does face some credible headwinds in the shorter term. Soaring inflation, the rising cost of materials, and the government’s response, which was to raise interest rates, has hurt it, and many other financial services businesses. For example, Direct Line has seen a material increase in the number of claims it is processing. This has led to it having to increase pricing, which has affected investor sentiment.
A positive aspect of Direct Line is its position as a dividend stock. In times of economic volatility, dividends can be cut to conserve cash and navigate stormy waters. Even if this happens, I believe it would be a shorter-term issue for me.
Why the Direct Line share price is calling me
Firstly, I believe Direct Line’s position in the insurance market is pivotal in terms of its longer-term recovery and success. It has a diversified business model and good brand power, coupled with several strategic key partnerships. All these facets should help boost growth, performance, returns, and investor sentiment in the longer term.
Earlier I mentioned Direct Line’s passive income opportunity. At current levels, the dividend yield stands at close to 12%. This is three times the FTSE 100 average of 3%-4%. Even if the dividend was cut due to recent issues, I would be confident it would surpass this average.
Last but not least, Direct Line has a strong balance sheet. This is crucial for me as a potential investor as it tells me the company has enough cash in the coffers to cope with the current headwinds. This could also keep the company paying out some form of dividend.
In conclusion, I believe Direct Line shares are in for a tough time in the shorter term. In fact, so are many other insurance and financial services organisations. However, I believe it has the tools, experience, brand, and cash to overcome these issues and be a great long-term buy for my portfolio.
I have decided to add Direct Line shares to my holdings imminently. They look more attractive to me since they fell and currently trade on a price-to-earnings ratio of just 10.
