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He FTSE 100 offers some wonderful opportunities and I’m rubbing my eyes watching this one. It is clear that I am not the only investor who is tempted.
insurance conglomerate Phoenix group holdings (LSE: PHNX) is now returning a whopping 10.96%. That is the highest performance of all the FTSE 100, as expected. It is also no surprise that it has attracted the attention of many investors.
Phoenix is now the most bought stock in the UK, according to the fund platform AJ Bell. The second most purchased is another insurer, Legal and General Group, which yields 8.96%. Investors love their dividend stocks right now.
Ultra high income
Yields are calculated by dividing a company’s dividend per share by its share price. It’s built into the fact that when the price of a stock falls, the dividend increases. In that sense, high performance is usually a sign of a company in trouble, rather than a prosperous company.
So it’s no surprise that Phoenix shares are down 25.95% in five years and 11.02% in 12 months. The last few weeks have also been difficult, despite all the interest from private investors. This offers a huge benefit to an investor like me who likes to buy blue chip stocks very cheap. Phoenix now trades at a super-cheap price of 5.78 times earnings.
Unfortunately, many investors will have bought Phoenix shares thinking they were too cheap to ignore, only to see their value fall further. So why are they doing so badly?
FTSE 100 insurance companies such as Phoenix, Legal & General and Aviva They are very exposed to the fortunes of the stock market. All of those client premiums are invested, so when stocks fall, so does the value of your assets under management.
This affects investor confidence, which is bad news for the share price. But this does not automatically jeopardize the dividend. Its future depends on whether the company can generate enough cash to maintain and ideally increase payments to shareholders. Right now it seems to me that Phoenix can do that.
Revenue can still flow
Usually when I see a double-digit return, I think it’s ready to be cut. Two stocks in my portfolio, Khaki and Rio Tinto, reached that level at the beginning of the year. In both cases, dividends have since been slashed. However, I don’t expect this to be repeated.
Phoenix’s recent first-half results, released on September 28, showed it generated £898 million in cash. Better still, long-term incremental cash generation for new businesses more than doubled, from £430 million to £885 million. That’s important, because Phoenix needs to continue finding new sources of cash to keep shareholders happy. Acquisitions have been their preferred method.
That positive outlook allowed it to increase the ordinary interim dividend per share by 4.83%, to 26 pence. So instead of cutting the dividend, the board increased it.
Not everything goes smoothly. Its solvency capital coverage ratio fell from 189% to 180%, but management insisted it is still resilient and should secure dividends in the future.
Assets under management rose by £10bn to £269bn, as markets recovered slightly in the first half of the year. Recent stock market volatility could impact that in the next set of results.
Despite those concerns, these numbers suggest that Phoenix’s sky-high dividend may be sustainable, and I can see why investors are rushing to buy it. I plan to join them.
