Phoenix Group Holdings (LSE: PHNX) has looked like the ultimate FTSE 100 dividend income share for several years, as far as I’m concerned.
The Phoenix share price was trading at a rock-bottom valuation of around six times earnings when I bought it on 30 January and again on 4 March. Better still, it was offering a dizzying yield of more than 10%.
Despite its charms, I was in two minds. Double-digit yields are notoriously fragile. Could this one really be sustainable?
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Can it keep funding those dividends?
So I checked again and again, but it really did look like Phoenix could afford to be this generous with shareholders. I was reassured to see the board had hiked payouts for eight of the last 10 years. The 2023 increase was a modest 2.5%, but given the high starting point, I could live with that.
Phoenix was also generating plenty of free cash flow – £2bn in full-year 2023. Better still, it secured an impressive £1.5bn of incremental new business long-term cash generation, ahead of target.
The balance sheet looked solid too, with a Solvency II (SII) surplus of £3.9bn, leaving its SII Shareholder Capital Coverage Ratio ended 2023 towards top-end of its 140-180% operating range.
Phoenix did post an IFRS loss after tax of £88m but that was down from £2.66bn in 2022, due to lower market volatility. It’s made a strong start to 2024 too.
With Legal & General Group and M&G also trading on low valuations while offering sky-high yields, I concluded this was a sector issue. Investors just weren’t into FTSE 100 financials.
There were reasons to be wary. They’ve been hit by recent stock market volatility, which threatened the value of the net assets they hold to underpin liabilities.
FTSE 100 high-yield star
Also, higher interest rates meant that investors could get decent yields from cash and bonds. So why put their capital on the line? Phoenix operates in a mature and competitive sector and, let’s be frank, its shares are never going to shoot the lights out.
Interest rates have peaked and may fall further. That should make today’s ultra-high Phoenix yield of 9.09% look more attractive relative to cash or bonds. At least that’s what I’m expecting, but there are clearly mysterious forces at play here.
I still can’t work out why investors haven’t been filling their boots. Either the market’s missing something, or I am.
However, there are signs the market’s coming round to my point of view. Phoenix shares have jumped 17.99% over the last six months. On a 12-month basis, they’re up 10.34%. That lifted the total annual return above 20%. Which isn’t too shabby.
Phoenix isn’t as dirt cheap today, trading at 17.43 times earnings. Investors are cautious and any stumble in revenues, new business growth or dividends will be punished. Despite that, I’m keen to buy more, ideally before the stock goes ex-dividend on 26 September. It may not be the biggest no-brainer buy, but I just can’t resist its passive income stream.
