The FTSE 100‘s home to a vast array of dividend-paying companies. However, Phoenix Group Holdings (LSE:PHNX) currently wears the crown for the highest level of shareholder payouts this month. At 9.8%, shareholders are supposedly earning near-double-digit returns from dividends alone.
That certainly sounds like it’s too good to be true. Yet, after digging a little deeper, this generous yield migh be here to stay. Let’s take a closer look.
A rising insurance titan
When it comes to life insurance, industry leaders like Aviva and Legal & General have historically dominated the space. Yet, Phoenix Group has been steadily and quietly growing in size despite the fierce competition.
Today, the company has £283bn of assets under administration. That still pales in comparison to Legal & General’s £1.16trn. But considering this number stood at just £68.6bn 10 years ago, Phoenix has drastically expanded its business.
So how did it do it? The strategy was surprisingly simple. Management focused on acquiring large but ultimately redundant life insurance policies and letting them run. The result was ample cash inflows with minimal payouts to customers.
In 2023, the firm generated just over £2bn in cash, exceeding the £1.8bn that was initially expected. And the group remains on track to generate another £4.4bn by 2026. At the same time, Phoenix aims to deliver £250m in annualised savings.
Needless to say, seeing large cash generation paired with higher profitability is an encouraging sign of dividend sustainability. As is management making dividends a priority in its capital allocation strategy. That’s why today’s 9.8% yield looks like an attractive opportunity, in my opinion.
What could go wrong?
Despite the strong operational performance coming from this enterprise, Pheonix is also at a bit of a crossroads. CFO Rakesh Thakrar is stepping down this year. He’s been with the company since 2001 and was the mastermind behind the M&A strategy that landed the company inside the FTSE 100.
It appears that the group’s historic acquisition-focused strategy has begun to lose steam now that Pheonix has grown to a much larger scale. And therefore management’s deploying a new strategy to make it less reliant on expensive acquisitions by building new business organically.
It’s quite a change of pace compared to how the firm’s been run over the last 20 years. And with that comes understandable uncertainty.
It’s too soon to tell whether this change in direction will be the success management anticipates. However, given the higher cost of debt in 2024, it sounds prudent on paper. Like many insurance companies, higher interest rates have been a bit of a double-edged sword for Phoenix.
Higher yields on government debt generate greater returns on its investment portfolio. But it’s also increased the amount of regulatory capital the group needs to hold. And that’s somewhat tied its hands in exploring new opportunities for growth, especially given its outstanding loans from acquisitions.
It’s a problem that management’s fully aware of. And its already managed to reduce its liabilities by £250m this year as it aims to cut its leverage ratio from 36% to 30% by 2026. All of this is to say Phoenix has its risks. But with the share price seemingly trading at a discount, it’s a firm I’m definitely taking a closer look at.
The post This FTSE 100 stock pays a 9.8% dividend yield! appeared first on The Motley Fool UK.
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Zaven Boyrazian has no position in any of the shares mentioned. 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.
