Up until early last March, I’d barely heard of FTSE 100 insurance firm Phoenix Group Holdings (LSE: PHNX).
I suspect this was because, like many, I didn’t realise it was behind powerhouse insurance brands Standard Life and SunLife, among others.
In fact, the only reason I noticed it at that point was that it was flashing red on my personal stock screener.
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This indicated a strong buy, based on my three key investment criteria. These are for a strongly growing business paying high dividends that looks undervalued against its peers.
It was tumbling in price, along with other financial firms, due to fears of a new financial crisis. These had been sparked by the failures of Silicon Valley Bank and then Credit Suisse around that time.
To me, this looked nonsensical as far as British FTSE 100 financial firms were concerned. It overlooked the capital-strengthening ordered by the Bank of England after the 2007 financial crisis.
It also overlooked the already substantial valuation mark-downs for these firms following the 2016 Brexit decision, justified or not.
Business growing stronger?
A new financial crisis does remain a risk for Phoenix Group, of course. Another is a deterioration in its hedging strategies for its capital position.
However, consensus analysts’ estimates are that earnings will jump 46% a year to the end of 2026.
One powerful engine for this growth is its extraordinary £2bn+ of cash generation up to end-2023 — a target achieved two years early.
Another growth engine looks to be its Pension and Savings business – increasing 27% last year. New business net fund flows also jumped — by 72% year on year to £6.7bn.
The firm now expects operating cash generation to rise by around 25% to £1.4bn in 2026. It’s also targeting a £900m IFRS-adjusted operating profit by that year.
Is it undervalued?
Phoenix Group trades at just 1.7 on the key price-to-book (P/B) measurement of stock value. This looks undervalued compared to its peer group average of 3.5.
On the equally important price-to-sales (P/S) valuation, it also looks undervalued compared to its competitors.
It trades at the lowest in its peer group by a long way – just 0.2 against the average of 1.6.
Huge dividend payer?
Phoenix Group’s 2023 dividend was 52.65p a share, which gives a yield on the current £5.03 share price of 10.5%.
This is one of the very highest in any of the main FTSE indexes. By comparison, the current FTSE 100 average yield is 3.8%.
So, £10,000 invested now in Phoenix Group would make me £1,050 this year in dividends. If the yield averaged the same over 10 years, then I would make £10,500 to add to my £10,000 investment. Of course, that is not guaranteed and the outcome could be worse.
Looking on the bright side though, if I reinvested those dividends back in the stock, I could make an additional £18,446! This would give me £28,446, paying me £2,824 a year in dividends, or £235 a month.
After 30 years on an average 10.5% yield, and reinvesting the dividends, I would have £230,185. This would pay me £22,849 a year, or £1,904 a month!
Given it still looks undervalued against its peers, pays a very high dividend, and looks set for strong growth, I will be buying more Phoenix Group stock very soon.
