Phoenix Group (LSE:PHNX) is a dividend giant of the FTSE 100. It has one of the most handsome yields on the index — top choice for passive income investors. However, the share price has been suffering of late. It’s down 20.3% over 12 months and 28.4% over five years.
So what can I expect from Phoenix Group? Is this a big dividend payer that’s going to continue shedding value? Or will we see the stock rise?
A mighty dividend
There are very few companies that offer dividend yields anywhere near double digits. While Phoenix Group has the strongest dividend yield of its peers, insurance companies can be a great place to look for a strong yield.
So why do insurance companies offer such strong dividend yields? Part of the reason is it’s a fairly mature part of the market. There’s not too much innovation and reinvestment taking place here.
But it’s also the fact that these are companies with strong cash flows. In other words, the regularity of the premiums we pay as customers mean the insurance companies are rarely short of the cash needed to pay dividends.
Phoenix Group actually has an excellent record of paying and increasing the dividend. In fact, payments have increased from 46p per share in 2018 to 50.8p per share in 2022.
The only concern would be the dividend coverage ratio. This tells us how many times a company can pay its state dividends from net earnings. A ratio of two is normally considered the benchmark for a healthy yield. Phoenix Group’s ratio is 1.6.
A matter of timing
Phoenix Group operates in a relatively conservative business environment, given the current state of the UK economy and the mature nature of the insurance sector. It’s not an overly risky market, but investors may be cautious about Phoenix Group’s higher levels of debt versus its peers.
However, amid a fairly slow moving backdrop, Phoenix Group has performed well. Recently, it announced it had surpassed its 2025 target two years ahead of schedule by securing £1.5bn in new business long-term cash generation in 2023.
It’s also a pretty big player in the Bulk Purchase Annuity market, completing seven significant transactions covering approximately £2.8bn of premiums in the latter half of 2023.
But in recent years, shares of high-paying dividend stocks have been among the hardest hit by rising interest rates. That’s because passive income investors, as well as other parties on the stock market, have moved capital away from stocks and towards cash and bonds.
So this situation shows we have knockdown stock, a company that’s performing above expectation, and hopes that interest rates will eventually fall. I think this creates a very strong opportunity to lock in a double-digit dividend amid a strong chance that falling interest rates will push the share price upward
It just might be the right time to pick up this dividend giant. I’m considering buying more.
