One passive income stock I’m interested in adding to my holdings is Phoenix Group Holdings (LSE:PHNX). Here’s why.
Insurance giant
Phoenix is one of the largest insurance providers in the UK with roots stretching back to 1857. Since this time, it has acquired multiple companies, including Standard Life Assurance and ReAssure Group. As I write, it has approximately 13m customers on its books.
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Phoenix shares are down 15% over a 12-month period. Currently, the shares are trading for 621p, whereas this time last year, the shares were trading for 731p.
Phoenix’s recent drop in share price, coupled with its juicy dividend yield, are tempting me to add the shares to my holdings to boost my passive income stream.
Risks involved
Phoenix Group is not a well-known name, in my opinion. Some of its brands are, however. The main one for me is Standard Life. It purchased Standard Life from Abrdn last year and Phoenix has a long track record of mergers and acquisitions (M&A).
There are credible risks to lots of M&As. Firstly, over-payment is one of the biggest pitfalls of acquisitions. This can lead to a dent in performance and shareholder returns. Next, integration issues are often common too. This is when the newly bought business struggles to integrate into the parent company that bought it. There is a chance Phoenix could fall foul of a bad acquisition that could affect performance and any passive income I hope to make.
The majority of Phoenix’s profits come from running bulk pensions and the maturing of life insurance policies. The issue here is that these businesses have very limited growth opportunities. A lack of future growth could affect the bottom line and any returns.
A passive income stock I’d buy
Many dividend stocks have a common characteristic, which is an excellent performance track record. I do understand that past performance is not a guarantee of the future, however.
Looking at Phoenix Group’s recent performance, it released a full-year report last month that made for excellent reading, in my opinion. It reported record cash generation of £1,717m, up from 2020 levels and higher than expected. Next, it also confirmed record new business cash generation of £1,184m, compared to £776m in 2020. Phoenix declared a final dividend of 24.3p per share, bringing its total payout for the fiscal year to 48.9p, up from 2020.
Phoenix Group has a good record of dividend growth as well. I can see that since 2017, the dividend per share has grown year on year. At current levels, the dividend yield is an inflation-beating 8%! It is worth noting the FTSE 100 average yield is between 3% and 4%.
As a passive income seeker, Phoenix Group looks like an excellent option for my holdings. The shares look cheap currently too due to the recent share price pullback, on a price-to-earnings ratio of just over 7. I’d add the shares to my holdings.
