Are 8.5%-yielding Phoenix shares an unmissable bargain after today’s surprise 5% drop?
Phoenix‘s (LSE: PHNX) shares boast one of the highest dividend yields on the FTSE 100. The yield’s nudged up to 8.5% today (8 September) after investors gave a cold reception to half-year results. Shares in Phoenix Group Holdings, to use its full name, are down 5% this morning, but I reckon the reaction may be a little harsh as there are plenty of positive numbers in there.
I hold this stock and even after todayâs drop, Iâm still sitting on an 18% share price gain over the last year. Add in the dividends, and my total return is around 26%. With the yield now even juicier, I think this could be my chance to buy more.
Top UK income star
The board said Phoenix was âfirmly on trackâ to hit its medium-term goals after first-half IFRS adjusted operating profits jumped 25% to £451m. Phoenix swung to a pre-tax profit of £8m, a big movement from last year’s £669m loss.
Operating cash generation rose 9% to £705m. Its Solvency II surplus nudged up to £3.6bn and the capital coverage ratio climbed from 172% to 175%, close to the top of its target range.
CEO Andy Briggs also confirmed that the group would change its name to Standard Life in March 2026, saying it would simplify operations and cut duplication, while bringing its âmost trusted brandâ to the fore. That makes sense to me. The Standard Life name is still recognised by many savers. Phoenix isn’t.
So why the downbeat reaction? Phoenix needs to keep generating plenty of cash to fund its mighty dividend, and total first-half cash generation fell 17.5%, from £950m to £784m. This was 3% more than forecast.
FTSE 100 high-yielder
Total income was also down 30% to £8.6bn, although that number is volatile and driven by market conditions. Despite these issues, Phoenix still lifted its interim dividend by 2.6% to 27.35p per share. In another plus, adjusted operating profit was 3% ahead of expectations.
Itâs worth remembering that Phoenix manages around £280bn of assets, to back up its insurance liabilities. If markets wobble this autumn, as they often do, Phoenix could take another knock. So anybody considering taking advantage of today’s drop must accept there may be more damage in the autumn. But that applies to almost every stock purchase today.
Long-term case
The business is steadily diversifying away from closed life insurance books into growing pensions and savings operations. It needs to keep driving new sources of revenue, to fund that payout. Even though cash generation dipped, I think the payout looks secure for now.
These are shaky times for the wider stock market, and Phoenix may be volatile. The danger is that if the board does hold or trim the dividend at some point, that could deal a big below to the share price.
Phoenix will need to keep cutting costs and finding fresh areas of expansion to maintain the flow of cash. But given the sky-high dividend yield, I think income seekers might still consider buying. The shares go ex-dividend on 2 October and I plan to up my stake before that date and grab that interim dividend.
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Harvey Jones 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.
