Should I Buy Direct Line Insurance Group?


LONDON -- Direct Line is the insurance company behind the Direct Line Insurance and Churchill insurance brands. With a market capitalization of 3.2 billion pounds, the company is close to gaining entry to the FTSE 100.

Direct Line is majority-owned by Royal Bank of Scotland (RBS). RBS retains ownership of 65% of Direct Line. The rest was sold off at IPO in October last year.

Early investors have done very well. Since float, shares in the company are up 24%.

Looking back, the October IPO was a great opportunity to buy the shares cheaply. As I commented at the time, Direct Line was being sold at a discount to its closest peers. There were also considerable pressures on RBS to make sure that IPO investors profited.

Are more rises in store?
According to the consensus of broker forecasts for the year, Direct Line is expected to report earnings per share of 16.6 pence. According to my quick-and-dirty calculations, the company could end 2013 with a net tangible asset value of around 185 pence per share. I believe that profit-making companies should not trade at a discount to their asset value. The asset value in Direct Line protects shareholders from downside. It will also keep increasing as long as the company remains profitable.

However, there is another factor that could come into play. With the FTSE 100 already up 4.9% so far in 2013, it is hard to escape the feeling that we are in a new bull market. If appetite for shares continues to increase, then a solid dividend-paying share like Direct Line could be a big beneficiary.

Further opportunities to buy
There could be further opportunities to make a quick profit on shares in Direct Line. Regulations mean that RBS must cease to own shares in Direct Line by the end of 2014. This means that the bank will likely offer more shares to the market again in 2013 and 2014. To do so successfully, it would probably have to offer the shares at a discount to the prevailing market price. This could be a great opportunity for income investors to secure future dividend rights and book a quick capital gain.

At today's price, Direct Line shares are forecast to yield 5.8% in 2013.

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