Insurance conglomerate Phoenix Group Holdings (LSE: PHNX) looks like one of the best stocks to buy when looking for dividend income today. Yet as ever with shares, it brings risks as well as potential rewards.
Phoenix has two obvious attractions. First, it offers one of the highest yields on the entire FTSE 100 at 9.56%. Second, its shares look dirt cheap, trading at just 6.54 times earnings.
I’m finding it really difficult to resist this combo of ultra-high income and an ultra-low valuation. In recent months I’ve bought Legal & General Group, Lloyds Banking Group, wealth manager M&G and housebuilder Taylor Wimpey. They’re all up between 15% and 20%, and that’s before the dividends start rolling in.
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I’m chasing dividends in 2024
I resisted Phoenix because the yield seemed a little too high. At times, it topped 10%. Could that really be sustainable?
Yet the board seems committed to its outsized payout. On 13 November, it hiked its full-year cash generation target to £1.8bn, up from around £1.3bn-£1.4bn. It hopes to generate a total of £4.5bn over the three years from 2023 to 2025. That’ll help secure shareholder payouts.
Markets forecast a yield of 9.9% in 2023 and 10.2% in 2024. These are projections rather than guarantees, but they do suggest the yield may endure.
Phoenix made its name as a closed-book consolidator, acquiring life funds that were closed to new business and running them cost-efficiently. Lately it has targeted growth through acquisitions, recently completing the merger of its Standard Life and Phoenix Life businesses into a single entity, Phoenix Life Ltd. It has also acquired SunLife and ReAssure. The group now boasts 12m policies across the UK and Europe.
This will bring further synergies, hopefully generating extra crash and shareholder value. Its low leverage ratio of around 25% should allow it to pursue further mergers and acquisitions too.
I reckon it’s time to buy
Yet the share price has done poorly for ages. Phoenix is down 25.22% over three years and 12.74% over 12 months. Sentiment has shifted in recent weeks, though, with the stock jumping 14.72% over the last month.
FTSE 100 financials generally have been boosted by hopes that interest rates have peaked and will soon start falling. As yields on cash and bonds slide, ultra-high dividend stocks like this one will look more attractive to income seekers.
A broader stock market recovery should also increase the value of the assets Phoenix holds to underpin its liabilities. Assuming the market does recover, that is.
Despite the recent share price bounce, Phoenix still looks good value trading at just 6.5 times earnings. I’m keen to add it to my list of income stocks but as I said, there are risks. While the FTSE 100 has jumped 4.27% in the last month, 2024 looks like being another bumpy year. Inflation may prove sticky, recession fears could linger, this month’s Santa rally could soon prove a distant memory. The Phoenix share price may fall.
In the longer run, it could undershoot its cash generation targets. Or it could struggle to find attractively priced acquisitions, slowing growth and disappointing markets.
Despite my concerns, that headline yield is hard to resist and I plan to buy Phoenix in January.
