Phoenix Group - a flaming good yield

Phoenix Group (PHNX.L): Thought: ‘tis better a shareholder be, than a policyholder be. There is money to be made out of closed life books and Phoenix is good at squeezing the cash juice out. Whether the policyholders rail against being trapped in low return products is another issue, with the FCA thematic review on the issue due before year-end. At least from the consumers’ point of view the new pension freedoms give them some increased clout (with Phoenix working with Just Retirement to provide customer choice). In this period Phoenix only wrote £208m of annuities against ££284m in the same period last year, but expects resilience in the remaining vesting business due to the popularity of their guaranteed annuity products.

In these interims, to 30^th June 2015, Phoenix generated an in-line £110m of cash, albeit this was down on the same period last year, when it was £332m. However, they are on track to meet their target of £200m-£250m for the year and a cumulative £2.8bn over the period 2014-19. This year is seen as a transition year as they prepare for Solvency II, implying that cash generation can recover in future years. Of the £2.8bn cash target, they have raised £1.1bn to date. So a further £100m say this year leaves £1.6bn for 2016-19, an average of £533.33m per annum. To put all those cash numbers into context, the annual dividend cost is very manageable at around £121m. The group MCEV held steady at £2.6bn, with the IGD surplus climbing from £1.2bn at year-end to £1.6bn. The dividend has been held at 26.7p, as they “demonstrate [their] commitment to a stable and sustainable dividend”. The group says that it is on course for meeting the new Solvency II rules and that the two remaining UK operating companies have achieved Insurers investment grade credit ratings at Fitch. This will take a useful 50bps off their current 312.5bps bank debt interest margin. Their ambition remains to build further on their position as the UK’s largest zombie book consolidator.

Normally the lack of dividend growth would dull my interest, but in this case the payment does seem sustainable, at the very least, and the group has a growth path to follow. The main risks would appear to be if the FCA fires a sidewinder or their Solvency II plans are rebuffed and more capital than planned is locked within the group. Assuming a maintained full year dividend of 53.4p, there is a 6.1% yield of at today’s 878p. The shares have been good performers since 2012, but they still look to be a hold and on any set back, that yield could become compelling. (Neil Cumming^, 20^th August 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower