The share price drop of FTSE 100 insurer Phoenix Group Holdings (LSE: PHNX) from its 12-month high is unwarranted in my view.
It began in earnest after rumours began early last February that a US bank was going to fail. This fuelled fears of a new financial crisis, prompting a sell-off in many financial stocks.
Silicon Valley Bank did fail a month later, as did Credit Suisse, but no financial crisis followed. However, Phoenix Group is still marked down.
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The advent of a genuine financial crisis remains a risk for the shares, of course. Another is that high inflation and interest rates deter new client business.
Nonetheless, I am seriously considering buying more Phoenix Group stock for three reasons.
Business on an uptrend?
H1 2023 results showed adjusted operating profit before tax of £266m, up from £254m in H1 2022.
Following industry-wide adoption of IFRS17 accounting procedures on 1 January 2023, it recorded a loss after tax of £245m. This compared to an £876m post-tax loss in H1 2022.
IFRS17 seeks to establish that accounts reflect timings of cashflows and any uncertainty relating to insurance contracts. In Phoenix Group’s case, the losses mainly arose from adverse market moves against investments to hedge its capital position.
On 13 November, the company upgraded its 2023 cash generation target to £1.8bn, against the previous £1.3bn-£1.4bn. It also boosted its cash generation target from 2023 to 2025 to £4.5bn, from the earlier £4.1bn.
This huge cash war chest is a massive resource to drive business growth.
Analyst expectations are now that its earnings and revenue will increase by 79.1% and 27.6% a year to end-2026. Forecasts are also for earnings per share to grow 59.8% a year to the same point.
Undervalued against its peers
The overall return of a high-yield stock is dramatically reduced if dividend gains are wiped out by share price losses.
So, ascertaining whether a company looks undervalued, overvalued, or fairly valued, is important to me.
Using a core basic metric, the price-to-book (P/B) ratio, I see Phoenix Group is trading at 1.6. Just Group is at 0.7, Chesnara at 1.2, Prudential at 1.8, and Legal & General at 3.
This gives a peer group average of 1.7. On this basis, then, Phoenix appears moderately undervalued against its peers.
Big dividend payer
Only a handful of FTSE 100 stocks pay dividends around the ‘magic’ 10% level. It is magic because 10% averaged over 10 years means investors double their investment.
Phoenix Group paid an interim dividend of 24.8p per share and a final dividend of 50.8p in 2022. Based on the present share price of £5.21, this gives a yield of 9.75%.
Currently, £10,000 invested in it would make £975 in passive income in a year. Over 10 years, provided the dividend stayed the same, the initial investment would make another £9,750.
This would not include gains or losses made from share price movements during the period, or tax liabilities.
Encouraging as well is that the interim dividend in 2023 was 4.8% higher than the previous year’s. This suggests to me a similar rise in the final dividend. Based on the current share price, this would give a yield of 10.2%.
