FTSE life insurer Phoenix Group Holdings (LSE: PHNX) first began flashing strongly on my personal stock screener early last March.
The reason was that the share price was falling fast, losing 12% of its value from 9 March to 20 March alone. Because a share’s yield rises as its price falls, this drop meant Phoenix Group was paying 9% at that point.
Around a year before, the FTSE 100 had finally recouped all the losses it had made during the Covid period. In my mid-50s, I decided I never again wanted to wait for growth shares to recover from any future disaster.
That was also around the time when developed market bond yields began to rise. 10-year UK government bonds offered a 4%+ yield with no risk attached. (The ‘risk-free rate’ is the 10-year government bond yield of the country in which an investor lives).
I could also get 6.2% from the UK government-backed National Savings & Investments Guaranteed Income Bonds. There was no risk to holding these bonds either.
So, I set my stock screener to identify shares paying 8% or more a year in dividends. This meant a 1.8% ‘charge’ for the additional risk of investing in stocks.
This was the minimum I required for effectively supporting a company with my money.
Clearly, as more people invest in a stock, the higher the share price goes. And the higher the share price goes, the better able generally a company is to conduct its business.
This includes securing better credit ratings in the long term, which in turn secures cheaper funding and more favourable handling by its banks.
A high yield alone is never sufficient for me to invest in a company, though. I also look for a strong core business, with high earnings growth prospects over the next few years.
Core business strength
Phoenix Group posted an H1 adjusted operating profit before tax of £266m, up from £254m in the same period the year before.
After tax, it made a loss of £245m, compared to a £1.258bn loss in H1 2022. But the losses primarily arose from adverse market moves against investments taken to hedge its capital position.
A risk here remains high volatility in financial markets. Another is that inflation pushes insurance premiums up and prompts customers to cancel policies.
The H1 2023 results also showed a 106% year-on-year increase in incremental new business long-term cash generation — to £885m.
On 13 November, it upgraded its 2023 cash generation target to £1.8bn, against the previous £1.3bn-£1.4bn.
It also boosted its cash generation target from 2023 to 2025 to £4.5bn, from the earlier £4.1bn.
This huge cash war chest is a massive resource to drive business growth.
Indeed, analysts’ expectations now are that earnings and revenue respectively increase by 73.2% and 27.6% a year to end-2026. Earnings per share is expected to grow by 62.6% a year over the same period.
As for whether I will add to my existing holdings in Phoenix Group, the answer is a resounding yes.
Its yield is still one of the highest in the FTSE 100, which remains a baseline consideration for me. I also see a lot of value left in the share price, driven by very high growth prospects.
The post A 9.6% yield but down 18%! Time for me to buy more of this FTSE gem? appeared first on The Motley Fool UK.
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Simon Watkins has positions in Phoenix Group Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
