The FTSE 100 throws up some wonderful opportunities and I’m rubbing my eyes looking at this one. I’m clearly not the only investor to be tempted either.
Insurance conglomerate Phoenix Group Holdings (LSE: PHNX) now yields a stunning 10.96%. That’s the highest yield on the entire FTSE 100, unsurprisingly. Equally unsurprisingly, it has attracted the attention of many investors.
Phoenix is now the most bought stock in the UK, according to fund platform AJ Bell. The second most bought is another insurer, Legal & General Group, which yields 8.96%. Investors do love their dividend stocks right now.
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Ultra-high income
Yields are calculated by dividing a company’s dividend per share by its share price. It’s baked in that when a share price falls, the dividend rises. In that respect, a high yield is often the sign of a company in trouble, rather than a thriving enterprise.
It’s therefore no surprise to see that Phoenix’s shares are down 25.95% over five years and 11.02% over 12 months. Recent weeks have been rocky too, despite all that interest from private investors. This does offer one huge benefit for an investor like me, who likes buying dirt cheap blue-chip stocks. Phoenix now trades at a super-cheap 5.78 times earnings.
Sadly, plenty of investors will have bought Phoenix shares thinking they were too cheap to ignore only to see their value fall even further. So why are they doing so badly?
FTSE 100 insurance companies like Phoenix, Legal & General and Aviva are heavily exposed to the fortunes of the stock market. All those customer premiums are invested, so when equities fall, so do the value of their assets under management.
That hits investor sentiment, which is bad news for the share price. But it doesn’t automatically imperil the dividend. Its future depends on whether the company can generate enough cash to maintain and ideally boost shareholder payouts. Right now, it looks to me that Phoenix can do that.
The income may still flow
Usually, when I see a double-digit yield, I think it’s ripe for the chop. Two shares in my portfolio, Persimmon and Rio Tinto, hit that level at the start of the year. In both cases, dividends have since been slashed. Yet I’m not anticipating a repeat here.
Phoenix’s recent first-half results, published on 28 September, showed it generated £898m of cash. Better still, incremental new business long-term cash generation more than doubled from £430m to £885m. That’s important, because Phoenix needs to keep finding new sources of cash to keep shareholders happy. Acquisitions have been its preferred method.
That positive outlook allowed it to increase the interim ordinary dividend per share by 4.83%, to 26p. So instead of cutting the dividend, the board increased it.
Not everything is hunky-dory. Its solvency capital coverage ratio fell from 189% to 180%, but management insisted it’s still resilient and should secure dividends going forward.
Assets under administration rose by £10bn to £269bn, as markets recovered slightly in the first half of the year. Recent stock market volatility could knock that in the next set of results.
Despite those concerns,, these figures suggest the ultra-high Phoenix dividend may be sustainable, and I can see why investors are racing to buy it. I plan to join them.
