The FTSE 100 is home to some dazzling yields at the moment, with more than a dozen companies paying income of over 7% a year. But what if that isn’t enough? For greedy income seekers like me, there’s always Phoenix Group Holdings (LSE: PHNX).
Phoenix shares are forecast to yield a dazzling 9.1% this year. Only two FTSE 100 companies beat that Vodafone Group (9.59%) and asset manager M&G (9.75%).
This was once a Pearl
Once yields get close to double digits, they can’t be taken for granted (I’m looking at you, Persimmon and Rio Tinto). So what about that stonking Phoenix yield?
Phoenix has a long history, having been founded as the Pearl Loan Company (later Pearl Group) way back in 1857. Its Phoenix Life business buys up legacy life insurance and pension funds that are closed to new business, and manages them on behalf of members. It seems like a dull, solid operation. But it can’t afford to stand still. It has to keep finding and buying more legacy funds to keep the cash and dividends flowing.
Sensing the danger, management has broadened the business by acquiring a wealth management arm, Phoenix Wealth (formerly AXA Wealth), as well as the Standard Life brand name, SunLife and ReAssure. In total it has 14m policyholders.
This gives it greater diversification within the insurance sector, but has done little for the share price, which is down 19.42% over five years and 7.03% over 12 months. That disappointing performance explains the high yield, of course. Such heady income levels are a sign of failure rather than success.
Still tempting, though. And if I took a chance on Phoenix and invested my full £20,000 Stocks and Shares ISA limit in this one stock, I’d get a staggering income of £1,820 a year. The dividend is covered 1.5 times by earnings, so may even be sustainable. At today’s P/E of 7.1 times earnings, I’d be picking up a bargain too.
Unfortunately, I’d also be picking up a loss-making business. Phoenix posted a pre-tax loss of £2.26bn last year, on top of a £688m loss in 2021. It has been hit by volatile stock markets with assets under administration falling from £310bn to £259bn. And it saw £2.67bn of adverse investment return variances, largely due to accounting volatility from its hedging approach.
Better than it looks
Yet it’s not as bad as it looks. Measured on an IFRS basis, adjusted operating profits grew to £1.24bn, up from £1.23bn in 2021. This allowed management to increase the full-year dividend by 5% from 48.9p to 50.8p per share. There’s life in that yield yet.
The Phoenix dividend per share has steadily increased for the last five years. And it was maintained during the pandemic in 2020, so it may be safer than it looks.
Like everyone else, it needs a stock market recovery. CEO Andy Briggs warning of a “challenging economic backdrop” in 2023. Yet he also set a new business cash generation target of around £1.5bn a year by 2025.
Buying Phoenix for income is undeniably risky, but I reckon it’s worth it. Maybe not with my full £20,000 ISA allowance, but I’ll invest £5,000 over the summer once I’ve built up enough cash. That would still give me income of £455 in the year ahead.
