Image Source: Getty Images
it’s fair to say that Direct Line Insurance (LSE: DLG) stocks have had one of the worst performers in my portfolio in the last two years.
I bought shares in this insurance group many years ago and everything went well at first. But since the beginning of 2021, the trend has been downward.
Last week’s earnings warning triggered a further decline. Direct Line shares are now trading below their 2012 float price, at record lows.
I’ll share my views on the Direct Line issues in a moment. But first, let’s take a look at the losses that investors might have suffered in the last two years.
Direct Line shares have fallen more than 40% since January 2021, from about 320 pence to about 175 pence today. Fortunately, the insurer has paid large dividends during that time, totaling 45 pence per share.
Looking at the numbers, my sums suggest that a £1,000 investment in January 2021 would be worth just £685 today, including dividends.
Is there hope for shareholders?
Direct Line’s problems began a few years ago. Competitive conditions in the auto insurance market made it more difficult to win business without lowering prices.
I think the company may have been a bit behind as well, in terms of IT and marketing.
Chief Executive Officer Penny James has launched a technology investment program to improve the company’s data analytics and pricing capabilities. Early signs looked promising to me, until last year’s inflation surge resulted in a sharp increase in auto claims costs.
The freezing weather before Christmas added to the misery: the company is currently handling around 3,000 claims for broken pipes and similar damage, at an estimated cost of £90m.
These are all temporary problems, in my opinion. Although they could happen again, they may not for a while. I think it’s also fair to expect Direct Line to budget more carefully in the future for these types of events.
If I’m not mistaken, the current drop in the stock price could be a buying opportunity.
A possible return of 11%?
Although Direct Line has canceled its final dividend for 2022, the firm has yet to comment on the 2023 dividend.
At the time of writing, broker forecasts for next year still suggest a dividend of perhaps 20p per share. That could give Direct Line shares an expected return of 11%, very tempting.
Personally, I think this payment is unlikely to go through. My sums suggest that we will see a much smaller dividend in 2023, although I would be happy to be wrong.
For now, I still own all of my Direct Line shares. I will probably wait until the company’s 2022 accounts are released in March before making a final decision.
I still like the business, which has a well-known brand and a large market share. Historically, it has also been very profitable.
My problem is that I have lost some confidence in the management of the company. I believe that some of the problems facing the company could have been planned for and handled more successfully than they were.
