A 9%+ yield but down 8%! Time for me to buy more of this hidden FTSE 100 gem?

This FTSE 100 stock has one of the highest yields in the index, looks set for strong growth, and met its huge cash generation target two years early.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

BUY AND HOLD spelled in letters on top of a pile of books. Alongside is a piggy bank in glasses. Buy and hold is a popular long term stock and shares strategy.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

FTSE 100 insurer Phoenix Group Holdings (LSE: PHNX) recently raised its annual dividend to 52.65p a share, from 2022’s 50.8p. This gives a yield on the current £5.50 share price of 9.6%.

It remains one of the very few shares in the leading index that pays an annual return of over 9%. By comparison, the average current yield of the FTSE 100 is 3.8%.

So, £10,000 invested now in Phoenix Group would make me £960 this year in dividends. If the yield averaged the same over 10 years, then I would make £9,600 to add to my £10,000 investment.

Should you invest £1,000 in Phoenix Group Holdings Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Phoenix Group Holdings Plc made the list?

See the 6 stocks

Crucially however, if I reinvested those dividends back into the stock, I could make an additional £16,017 instead! This would give me £26,017 in total, paying me £2,373 a year in dividends, or £198 a month.

Over 30 years on an average 9.6% yield, I would potentially have £176,113, paying me £16,060 a year, or £1,338 a month!

Is the high yield sustainable?

In 2023, Phoenix Group built a cash pile of over £2bn, exceeding its already-upgraded target of £1.8bn. New business long-term cash generation was just over £1.5bn, achieving its 2025 target two years early.

This should allow it to keep paying high dividends in the coming years. It should also be a major engine for continued high growth.

Last year saw its Pension and Savings business grow 27% compared to 2022, and new business net inflows jumped 72% to £6.7bn.

The firm now expects operating cash generation to rise by around 25% to £1.4bn in 2026. It is also targeting a £900m IFRS-adjusted operating profit by that year.

Consensus analysts’ expectations are for earnings to grow 41% a year to end-2026. Earnings per share are also expected to increase 54% a year to that point.

One risk for Phoenix Group remains a new global financial crisis. Another is a deterioration in the recent major improvement in its hedging strategies for its capital position. However, both are somewhat mitigated by the huge cash war chest and by its continued high growth, in my view.

Undervalued shares?

Despite a recent rise in price after its strong 2023 results, the stock is still down 8% from its 12-month high.

I think it now looks very undervalued against its peers. This means to me that there’s a reduced chance my dividend gains will be wiped out by share price losses, not that this can be guaranteed.

Specifically, Phoenix Group trades at just 1.8 on the key price-to-book (P/B) measurement of stock value. This compares to a peer group average of 3.7.

On the equally important price-to-sales (P/S) valuation, it also looks undervalued compared to its competitors. It trades at just 0.3 – the lowest in its peer group, the average valuation of which is 1.6.

Created with Highcharts 11.4.3Phoenix Group Plc PriceZoom1M3M6MYTD1Y5Y10YALL2 Apr 20192 Apr 2024Zoom ▾Jul '19Jan '20Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '23Jan '242020202020212021202220222023202320242024www.fool.co.uk

Will I buy more?

I will be buying more Phoenix Group shares very shortly for the three key reasons analysed in depth above.

But to reiterate, the very high yield looks to me like it will continue, generating significant passive income in the years to come.

Plus I think the business shows all the signs of continuing to grow stronger. And despite the recent price rise, the stock still seems to be undervalued.

5 stocks for trying to build wealth after 50

The cost of living crisis shows no signs of slowing… the conflict in the Middle East and Ukraine shows no sign of resolution, while the global economy could be teetering on the brink of recession.

Whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times. Yet despite the stock market’s recent gains, we think many shares still trade at a discount to their true value.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. We believe these stocks could be a great fit for any well-diversified portfolio with the goal of building wealth in your 50’s.

Claim your free copy now

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

We think earning passive income has never been easier

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

More on Investing Articles

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Dividend investors! Here’s what Warren Buffett says builds wealth in the stock market

Reinvesting dividends at yields of 8% or higher looks like a good way of building wealth. But Warren Buffett has…

Read more »

Calendar showing the date of 5th April on desk in a house
Investing Articles

Here’s my Stocks and Shares ISA plan for 2025-26

A Stocks and Shares ISA helps investors avoid taxes on dividends and capital gains. And Stephen Wright has a plan…

Read more »

Dividend Shares

Of the 20 highest-yielding FTSE 100 stocks, this is my top pick

This FTSE 100 stock currently offers a yield of 6.4%. But Edward Sheldon believes it’s capable of providing share price…

Read more »

Investing Articles

Could Tesla’s share price jump over the next 12 months? These analysts think so!

Tesla's share price has fallen by almost a third since 1 January. But optimism is high that Elon Musk's company…

Read more »

Investing Articles

I asked ChatGPT where the FTSE 100 will be in 6 months: here’s what it said…

Let’s be realistic, ChatGPT can’t predict the future. But it did do a good job of compiling data from brokerages…

Read more »

Investing Articles

Could the Rolls-Royce share price hit £10?

The Rolls-Royce share price has taken most analysts by surprise with almost everything going right for the British engineering giant.

Read more »

Investing Articles

4 REITs Fools own for passive income

REITs often have higher-than-average dividend yields compared to other stocks, making them a solid choice to consider for passive income…

Read more »

artificial intelligence investing algorithms
Investing Articles

Up 272% in just a year, is Palantir stock just getting started?

This writer recognises that Palantir has grown its business very well -- but does the stock price offer him an…

Read more »