An 11% yield but down 29%, this passive income star looks like a hidden gem

Down sharply but undervalued to its peers, with strong business brands and a high yield, this FTSE 100 stock seems to be a passive income star to me.

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Shares in perennial passive income star Phoenix Group Holdings (LSE: PHNX) have dropped 29% since their 3 February high this year.

A significant part of this, I think, is simply due to a lack of name recognition among many small investors. Such investors sometimes push well-known stocks perhaps higher than they should go on their name alone.

Ironically though, many of the business brands operated by the company are extremely well-known. Standard Life, Pearl Assurance, and Sun Life all help to make Phoenix the UK’s largest long-term savings and retirement business.

For me though, this absence of parent company brand premium adds to the hidden value of the stock.

Significantly undervalued?

The drop in the share price this year does not automatically make the stock undervalued, of course. The fall may just mean the company is worth less.

There are risks in the shares, as with all stocks. One is that high inflation and interest rates may cause a deterioration in the assets it manages. High inflation also tends to push insurance premiums higher and prompt customers to cancel policies.

To help ascertain its true value, I look at key metrics such as the price-to-book (P/B) ratio.

Phoenix is currently trading at a P/B of 1.4. This compares to Just Group’s 0.6, Chesnara’s 1.1, Prudential’s 1.7, and Legal & General’s 2.5.

Therefore, Phoenix offers good value based on this metric compared to the peer average of 1.5.

The question for me is what should its fair value be in share price terms? This is best answered, I think, by use of the discounted cash flow (DCF) valuation.

Given the assumptions involved in this, I do not rely on my figures alone, but look at several analysts’ DCF valuations.

The core assessments for Phoenix are between around 32% and 47% undervalued. Taking the lowest of these would give a fair value per share of about £6.75.

This does not mean that the stock will reach that point, of course. But it does indicate to me that there’s currently very good value on offer.

Huge passive income

In 2022, the company paid a total dividend of 50.8p. On the current share price of £4.60, this gives a yield of 11%. This is one of the very highest in the FTSE 100.

It could well go even higher, I think. The interim dividend last year was 24.8p, but this year it increased by 4.8%, to 26p.

If this rise continued to the total dividend this year then the payment would be 53.24p. Assuming no change in the share price, this would give a yield of 11.5%.

Even on the current payout, if I invested another £10,000 now I would make £1,100 this year in dividend payments.

Over 10 years, this would add another £11,000 to my initial £10,000 – more than doubling my money. This is over and above share price gains or losses and tax obligations incurred.

Although I already hold shares in the company, I am seriously considering buying more. I think it could recoup all of this year’s 29% loss at some point. I also think it could gradually converge towards its fair value over time, in addition to paying stunning dividends. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Simon Watkins has positions in Legal & General Group Plc and Phoenix Group Plc. The Motley Fool UK has recommended Chesnara Plc and Prudential Plc. 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.

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