Phoenix Group (LSE:PHNX) shares get lots of attention from investors because of their huge dividend potential.
This isn’t surprising. At 11.1%, the financial services provider has the largest forward dividend yield on the FTSE 100 today. Phoenix also has a long record of dividend growth, with cash payouts having risen in nine of the last 10 years.
What gets less focus is the company’s colossal growth potential. Earnings rose 38% year on year in 2023. And City analysts expect them to continue growing strongly through to 2026 at least, as the table below shows:
| Year | Earnings per share | Annual growth | Price-to-earnings (P/E) ratio |
|---|---|---|---|
| 2024 | 45.27p | 38% | 10.8 times |
| 2025 | 55.08p | 22% | 8.9 times |
| 2026 | 62.31p | 13% | 7.8 times |
Phoenix’s share price is down 9% in 2024, and has slumped more recently over moderating expectations on interest rate cuts. But if City forecasts start to look accurate, I’d expect its shares to spring higher again.
But how accurate are current earnings estimates? And should investors consider Phoenix shares for their portfolios?
Turning the corner
After earlier interest rate shocks, Phoenix bounced back strongly in 2023 and hit its growth targets way ahead of schedule.
It enjoyed strong demand at both its Pensions and Savings and Retirement Solutions divisions, the latter driven by a boom in bulk purchase annuities (BPAs). This meant it achieved incremental new business long-term cash generation of £1.514bn, hitting a target of £1.5bn two years ahead of plan.
Phoenix’s trading performance has remained rock-solid since then. Adjusted operating profit leapt 15% in the six months to June, helped by strength across its product ranges as well as widespread cost-cutting.
Impressively, total cash generation also rose 6% year on year to £950m, and its Solvency II ratio was 168% as of June, at the top end of its 140-180% range. This is significant, as Phoenix has the strength to invest for growth while also continuing to pay its large dividends.
Looking good
But can the business keep its impressive run going? I think it can. It has massive structural opportunities to capture, as the world’s rapidly ageing population drives demand for pensions, wealth and retirement products.
And Phoenix has well-loved brands it can use to exploit its growing market. The likes of Standard Life and SunLife have around 12m customers on their books.
There are still risks to company earnings, of course. The firm’s first-half performance was dented by the continuation of higher interest rates and adverse movements on equity markets. These could remain problematic too if global inflation stays ‘sticky’.
A bargain?
But on balance, I think things are looking good for Phoenix’s bottom line, driven by those demographic opportunities. The outlook’s also supported by an expected fall in interest rates over the next couple of years.
With earnings multiples below 10 times for the next two years, I think the risks to growth forecasts are currently baked into Phoenix’s share price.
In fact, with the company also carrying those double-digit dividend yields, I think it’s a top value stock to consider.
