When it comes to dividends, insurer Phoenix Group (LSE: PHNX) is one of the big beasts in the FTSE 100. Its mammoth 9.9% dividend makes it among the most lucrative FTSE 100 dividend shares. When it comes to share price movement, though, Phoenix is more underwhelming.
Over the past five years, for example, it has moved up just 3% — yet during that period, the FTSE 100 index has soared 55%.
Five years ago the market was still in the middle of pandemic turmoil and that may be a factor in the gap. But even over a one-year timeframe, the Phoenix share price has underperformed relative to the index. Phoenix has fallen 1% in the past 12 months, while the FTSE 100 has moved up 5%.
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What is going on – and might it still make sense for an investor to consider Phoenix despite its underwhelming share price performance?
A high dividend can be attractive, but also scary
Perhaps counterintuitively, I think part of the challenge for Phoenix could actually be its dividend.
That may sound odd, but when a company has a high yield, it can sometimes make investors fearful about how likely the payout is to be maintained.
M&G, for example, has a 10.5% yield and last month announced the latest increase in its annual dividend per share, yet the M&G share price is down 10% over the past year.
Still, it is up 74% over five years. Again though, I think that may simply reflect a pandemic-era baseline. Going slightly further back, to M&G’s listing in 2019, the performance to date has been a 15% share price fall despite a consistently high dividend yield.
In the case of Phoenix, I think the combination of a business seeming rather dull (as insurance can do) with being difficult to understand has also constrained investor enthusiasm for the stock.
Phoenix could be a high-yield bargain
Still, while some shares do not excite investors, money tends to talk. If Phoenix has strong potential as a business, why has its share price performed weakly over time even while the firm continues to hand out generous dividends?
There are risks here that could provide some explanation. Long-term valuation assumptions about the sorts of policies housed on Phoenix’s books can be challenged by unforeseen movements in the economy, for example. So a business that seems profitable for many years can suddenly start making far less money than expected as the economy shifts.
But while profits are an accounting concept, cash flows show the hard, cold cash a business is generating.
Last year, Phoenix’s operating capital generation was £1.4bn. It achieved that level two years ahead of schedule. It now expects operating capital generation to grow by mid-to-high single-digits annually, in percentage terms.
If it can achieve that, the dividend looks comfortably secure to me. Phoenix’s progressive dividend strategy foresees annual growth in the dividend per share, although no dividend is ever guaranteed.
For that level of operating capital generation, the market capitalisation of £5.4bn looks low to me.
Over the medium-to-long term, I would expect solid business performance could justify a higher share price for Phoenix. On top of that, I reckon the high yield makes this a share investors should consider.
