Phoenix Group Holdings (LSE: PHNX) remains a core holding in my passive income portfolio. With the shares down from their high this year, I am seriously considering buying more for three key reasons.
Strongly growing business
H1 results showed a 106% year-on-year increase in incremental new business long-term cash generation — to £885m.
The company is confident it can deliver at the top end of its 2023 £1.3bn-to-£1.4bn cash generation target. For 2023-2025, the target is £4.1bn, which will provide a huge war chest for generating further growth.
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H1 also saw a huge reduction in its IFRS net loss — to £245m compared to £876m in H1 2022 — although clearly it remains loss-making. This was largely reflected in earnings per share (EPS) improving from a £1.30 loss in H1 2022 to a £0.27 loss in H1 this year.
Over the last three years on average, its share price growth rate has exceeded its earnings growth rate by 75% per year. This signals to me a potential major valuation gap in the stock.
There is a risk that high inflation and interest rates may cause a deterioration in the assets it manages. Another is that high inflation pushes insurance premiums up and prompts customers to cancel policies.
Undervalued to peers
To ascertain whether there is a valuation gap, I compared Phoenix Group’s price-to-book (P/B) ratio with those of its peers.
Currently, it is trading at a P/B of 1.4. This compares to Just Group’s 0.6, Chesnara’s 1.2, Prudential’s 1.8, and Legal & General’s 2.6 – an average of 1.6. Phoenix Group is undervalued compared to this.
To gauge how much, I used the discounted cash flow (DCF) method. Given the assumptions involved, I factored in several analysts’ DCF valuations and my figures.
The core assessments for Phoenix Group are now between around 36% and 47% undervalued. The lowest of these would give a fair value per share of about £7.34, compared to the current £4.70.
This does not mean that the stock will reach that point. But it does further underline to me that it appears undervalued.
Passive income star
In 2022, Phoenix Group paid an interim dividend of 24.8p per share and a final dividend of 50.8p. Based on the current share price of £4.70, this gives a yield of 10.8%.
This places it in an elite group of FTSE 100 firms whose shares pay over the magic 10% level. It is magic because investors would double their money if the yield stayed the same over 10 years.
Currently, £10,000 invested in Phoenix Group would make £1,080 in passive income in a year. Over 10 years, provided the dividend stayed the same, the initial investment would make another £10,800.
This would not include gains or losses made from share price movements during the period, or tax liabilities.
Extremely important for me as well is that such payments are reasonably well-covered by the business. In 2020, the dividend cover ratio was 1.93, in 2021 it was 1.62, and last year it was 1.6. A ratio above 2 is considered good, while below 1.5 indicates the risk of a dividend cut.
Encouraging as well is that the interim dividend this year was 4.8% higher than last year’s. This suggests to me a similar rise in the final dividend, which would likely mean it yielding well over 10% again.
