I robbed Mr Market of this cheap FTSE stock!

Young female analyst working at her desk in the office

In the first half of 2022, my wife and I resisted buying any new shares. That’s because I had confidently predicted that US stocks would collapse, dragging down global markets. And this duly happened, with the S&P 500 index losing almost a quarter of its value at 2022’s low. But then we pounced, raiding the FTSE 350 by buying nine shares at low prices.

Six of our cheap stocks came from the blue-chip FTSE 100, while three came from the mid-cap FTSE 250. And some of our entry prices were so attractive that I felt like I was robbing the mythical ‘Mr Market’ at times!

We bought this FTSE share for ultra-high dividends

I’m rather pleased that my wife swooped to buy shares in FTSE 250 firm Direct Line Insurance Group (LSE: DLG) recently. In late July, we bought a modest stake in this well-known insurer at an all-in price of almost exactly £2. (This price includes the 0.5% stamp duty on share purchases and buying commission).

Having worked in the insurance/investment market for over 15 years, I’ve long been an admirer of the insurer with the famous red-telephone logo. Formed in 1985, the group started out selling motor insurance over the phone, growing rapidly to become a leading industry player. Later, it branched into selling other general-insurance policies, including life, pet, travel, and business insurance.

But regulatory changes to renewal premiums and soaring claims costs have hammered UK insurers in 2022, with many share prices slumping. Here’s how Direct Line shares have fared over six different timescales:

Five days 3.8%
One month -11.9%
Six months -29.5%
2022 YTD -23.0%
One year -30.5%
Five years -44.2%

This FTSE 250 stock has had a pretty rough ride lately, losing over three-tenths of its value in the past year, while almost halving over five years. But I believe that this quality business has temporarily fallen on hard times. Thus, I see it as one of my favourite investments: what I call a ‘fallen angel’ (and perhaps the sort of stock that might just interest famed value investor Warren Buffett).

Direct Line still looks cheap to me

As I write, Direct Line shares hover around 215.2p (up 7.6% since our purchase). This values the group at over £2.8bn, putting it among the FTSE 250’s heavyweights. At this price level, the stock trades on a price-to-earnings ratio of 10.7, which looks inexpensive to me versus the wider London market. This translates into an earnings yield of over 9.3% a year, which also looks good to me.

But what really pushed us to buy this FTSE 250 share was the whopping dividend yield on offer: almost 10.6% a year. This is more than 2.6 times the 4% cash yield available from the FTSE 100 index. Now for the bad news: this dividend is currently not fully covered. This means that this cash distribution is not covered by Direct Line’s latest earnings. However, Direct Line held its interim dividend at 7.6p a share and indicated that it has no plans to cut this payout any time soon.

To sum up, my wife bought Direct Line shares for their bumper dividend. However, a consumer-led recession could cause this stock to plunge again. And then we might buy more shares at even lower prices…

The post I robbed Mr Market of this cheap FTSE stock! appeared first on The Motley Fool UK.

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Cliffdarcy has an economic interest in Direct Line Insurance Group shares. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services, such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.