The market welcomes the proposal of a special dividend from insurer Direct Line (DLG), nudging up the shares by 0.6% to 208.3p. The 4p cash per share payout will be funded by the sale of its UK closed life business.
The operation is being bought by insurer Chesnara (CSN) for £39.3 million. Its shareholders must vote on the acquisition, which, if approved, could complete by early December.
While 4p may not seem that big a number, it is worth considering that analysts forecast Direct Line will pay 12.6p per share in normal dividends for the year to 31 December. Adding on the 4p special payout takes the total shareholder rewards to 16.6p and means today's share price equates to an 8% prospective dividend yield.
Direct Line will recognise a £12 million gain from the sale of its domestic life business which has 150,000 polices and made a £6.9 million pre-tax profit in 2012.
Direct Line has been cutting costs as competition in the general insurance industry heats up. This included the loss of 2,000 jobs during the summer.
Stockbroker Numis has lowered its pre-tax profit forecasts for Direct Line in 2014 and 2015 by 2%. It still believes the potential disposal is positive as it proves management’s commitment to streamlining the business.
Royal Bank of Scotland (RBS) intends to sell its stake in Direct Line by the end of 2014. It presently holds 28.5% of the insurer.