Congratulations Phoenix Group Holdings (LSE: PHNX) on the FTSE 100’s highest dividend yield!
The yield has surged to 11.01% as I write. That’s not just high, it’s stratospheric. The best stocks worldwide rarely offer this much passive income. If it was a reliable yield, I’d snap it up in a heartbeat.
Reliability is the key question here. Is this weighty payout just a flash in the pan? Or can I rely on big income for years and decades to come? Here’s my take, along with whether I’m buying in here or not.
Only a few months ago, the yield stood at just 8%. Since then, the share price has been sliding, falling around 28% from its high in February. The drop in the value of shares bumped the yield up to its 11% number.
So the payout has grown larger and larger, and yet investors are still fleeing the stock. So what’s going on?
Insurers suffering
Well, a large part of the business is the management and acquisition of life and pension funds. In short, they manage a lot of money – a balance sheet in the hundreds of billions – and return that money in insurance payouts.
These liabilities need to be relied upon, so insurers like Phoenix buy safe-yielding bonds. However, high interest rates, like those we deal with at the moment, make bonds bought at lower interest rates worth less.
The current economic environment poses other issues too, like inflation meaning people have less cash to take out policies.
All insurance firms have been suffering lately. It’s why the share prices of other FTSE 100 insurers like Aviva and Legal & General are falling too.
There are parallels to the collapse of Silicon Valley Bank earlier this year. The rise of interest rates created a squeeze on asset values. When customers asked for their money, the bank couldn’t return it. But Phoenix doesn’t face quite the same issue.
Dividend forecasts
It’s not a bank, so queues down the street of worried folks demanding their cash aren’t the problem. It has taken a hit on its assets, and this will worsen the longer interest rates remain high, but I’d say we might have an undervalued opportunity here.
The dividend forecasts for the next two years are to increase. It’s true that last year’s earnings showed a net loss of a couple of billion, but the accounting is rarely simple with a finance firm. Actually, the next few years of dividends are already on the balance sheet. I don’t see the short-term dividend under threat. The long term, though?
Big balance sheet
Well, looking more than a few years ahead is difficult. Again, this is a finance firm that comes with its own unique risks. It has a gargantuan balance sheet that isn’t easy to understand. This is what has put me off buying in before.
Still, it’s hard not to see the opportunity here. I’ve added the stock to my watch list and may buy in soon.
