As a broadly contrarian investor, FTSE financial stock Phoenix Group Holdings (LSE: PHNX) has long appealed to me.
A key reason is that it is not a well-known stock in the broader investment community. This means its share price is not inflated by brand recognition, which can result in paying more for less in value terms. I prefer the equation to be the other way around.
A further look into the stock led me to buy it for three further reasons some time ago. All those factors remain in place, as far as I am concerned, although there are risks in the shares as with any stock.
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One is that high inflation and interest rates may cause a deterioration in the assets it manages. Another is that high inflation tends to push insurance premiums up and prompt customers to cancel policies.
Booming core business
Although Phoenix Group’s name is not well-known, many of its brands are, including Standard Life, Pearl Assurance and Sun Life.
These helped it generate a 106% year-on-year increase in incremental new business long-term cash generation in H1 — to £885m.
The company is confident it can deliver at the top end of its £1.3bn-to-£1.4bn cash generation target this year. For 2023-2025, the target is £4.1bn.
This huge cash war chest should give it enormous scope for further investment for growth.
Huge passive income
In 2022, Phoenix Group paid a total dividend of 50.8p. At the current share price of £4.41, this gives a yield of 11.5%. This is one of the very highest in the FTSE 100.
This means a £10,000 investment now would make £1,150 this year in dividend payments. Over 10 years, this would add another £11,500 to the initial £10,000 – more than doubling the investment.
This is over and above share price gains or losses and tax obligations incurred, of course.
Significant price discount
The 32% drop in the share price this year does not automatically make the stock undervalued. The business might simply be worth less than it was before.
To work out which it is, I started by comparing its price-to-book (P/B) ratio with those of its peers. Currently, it is trading at a P/B of 1.4. This compares to Just Group’s 0.6, Chesnara’s 1.1, Prudential’s 1.6, and Legal & General’s 2.4.
Therefore, Phoenix Group offers moderately good value based on this metric compared to the peer average of just over 1.4.
To gauge the level of undervaluation, I used the discounted cash flow (DCF) method. Given the assumptions involved in this, I use several analysts’ DCF valuations and my figures.
The core assessments for Phoenix are now between around 21% and 50% undervalued. Taking the lowest of these would give a fair value per share of about £5.58.
This does not mean that the stock will reach that point. But it does indicate to me that it currently offers good value.
Given the even heavier share price discount now than when I first bought them, I am seriously considering buying more.
I think it could recoup this year’s 32% loss at some point, although precisely when is impossible to predict. I also think it should gradually converge towards its fair value and continue to pay stellar dividends.
