Direct Line Group (LSE:DLG) shares had one of the largest dividend yields on the FTSE 350. However, it elected not to pay a final dividend last year as high claims inflation caused it to swing to a £45.1m pre-tax loss.
As a result, the share price tanked. So if I’d have invested in Direct Line shares a year ago, would I have lost money? And what’s next for the insurer?
Let’s find out.
One tough year for shareholders
If I had invested £1,000 in Direct Line shares a year ago, today I’d have just £660 plus dividends, around £30. That’s clearly a terrible return on my investment.
The stock is down 34% over one year and 46% over two years. In fact, over the past 12 months, Direct Line Group has been one of the worst performing stocks on the FTSE 250.
What now?
After that performance, investors will likely remain wary of the insurer. And this wariness has likely been exacerbated by the firm’s Q1 report on Tuesday.
The group said rising claims in its motor segment, including commercial, particularly in relation to damage, will put pressure on earnings. “This is expected to put pressure on earnings in 2023 including from prior-year reserve releases”, it cautioned.
However, on a positive note, the company said that average renewal premiums increased 19% in Q1 providing some buffer on margins. The insurer also highlighted that it had incurred “modest” weather event claims in Q1, “well within” the 2023 full-year assumption of £80m.
The share price dipped on Tuesday following the mixed results.
Dividends
The Direct Line Group dividend has a major impact on the share price. After all, when this company cut its dividend, the share price collapsed. Investors will want to see steady and sustainable increases in the dividend from here on.
Direct Line paid a total dividend of 7.6p per share for 2022, down significantly from 22.7p the year before.
But the signs were there. The coverage ratio — a financial metric that measures the number of times a company can pay dividends to its shareholders from earnings — was 1.08 in 2021 and 1.17 in 2020. The big yield was unsustainable.
According to City analysts, annual dividends are expected to recover in the coming years. The forecast for 2023 is 12.9p per share before shooting upwards to 18.3p next year.
This would represent a 7.5% yield for 2023, far above the index average, around 3.2%. Taking into account the current share price, the forecast would represent a 12% yield for 2024. That’s really something worth thinking about.
One for my portfolio?
Direct Line is certainly a stock worth considering. But I’m going to wait for another quarter to pass before making any decisions. However, I appreciate the rewards for buying now could be great. After all, who wouldn’t want a stock paying a 12% yield next year?
