If I’d invested £1k in Direct Line shares 2 years ago, here’s how much I’d have now

It is fair to say Direct Line Insurance (LSE: DLG) stock has been one of the worst performers in my portfolio over the last few years.

I bought shares in this insurance group a few years ago, and everything went well at first. But from the beginning of 2021, the trend is down.

Last week’s profit warning led to further declines. Direct Line shares are currently trading below their 2012 flotation price, at record lows.

I will share my views on the Direct Line issue in a moment. But first, let’s take a look at the losses that investors have suffered over the past two years.

Direct Line shares have fallen more than 40% since January 2021, from around 320p to around 175p today. Fortunately, the insurance company has paid a large dividend during that time, totaling 45p per share.

With these numbers, my calculations show 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 started a few years ago. The competitive conditions in the motor insurance market make it more difficult to win business without lowering prices.

I think it’s also possible that the company is a bit backwards, both in terms of IT and marketing.

Chief executive Penny James launched a technology investment program to improve the company’s data analysis and pricing capabilities. Early indications look promising to me, until last year’s spike in inflation led to an increase in the cost of motor claims.

Freezing weather before Christmas added to the misery – the company is currently handling around 3,000 claims for burst pipes and similar damage, costing £90m.

These are all temporary issues, in my view. Although they can happen again, they can’t for a while. I also expect that Direct Line will budget more carefully in the future for this type of event.

If I’m right, then the current decline in share prices could be a buying opportunity.

A can 11% yield?

Although Direct Line has withdrawn its final dividend for 2022, the company has yet to comment on its 2023 dividend.

At the time of writing, the brokerage’s forecast for next year still suggests a dividend of perhaps 20p per share. That could give Direct Line shares a forecast yield of 11% – very tempting.

People, I pay this trust to go ahead. My numbers suggest it will get a smaller dividend in 2023 – although I’d love to be wrong.

Currently, I still hold all of my Direct Line stock. I will wait until the company’s 2022 accounts are published in March before making a final decision.

I still like the business, which has a well-known brand and a large market share. Historically, this has also been very profitable.

My problem is that I have lost faith in the management of the company. I think some of the problems faced by the firm could have been planned for, and handled more successfully than they were.