Ordinary dividend has increased alongside the announcement of a special dividend, but these are less than last year’s.
Mixed results for Direct Line cause volatile opening for shares
- Drop in profits and cut in overall dividends cloud optimism.
- Transitionary period casting uncertainty over market.
- Increase in premiums and bolstered capital position display positives and therefore we maintain our ‘hold’ recommendation for income-seeking investors.
Insurance group Direct Line today posted a 5.3% drop in gross written premiums to £3.2bn for the year to December, partly due to the decision to pull out of deals with Sainsbury’s and Nationwide. Operating profits fell by 6.4% to £601.7m although the company’s capital position strengthened with the combined ratio up by 5% to 170%. This enabled it to raise the ordinary dividend by 2.9% and announce a special dividend of 8.3p, although that is almost half of what it paid last year.
Mixed Market Reaction
These were a mixed set of results and the market was clearly unsure about how to react to them initially with a small decline in the share price rapidly reversed. The increase in its own premiums is welcome, and while the decision to bolster the capital position is sensible, the drop in profits and cut in overall dividends are clearly negatives for investors. The market’s uncertainty may also be due to the fact that the company’s leadership is in the process of transitioning from long-serving CEO Paul Geddes to chief financial officer Penny James.
Our View on Direct Line - Hold
We continue to recommend the shares as a ‘hold’ for income-seeking investors willing to accept a medium level of risk.
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