Are Phoenix Group shares worth buying for the 11.6% dividend yield?

Phoenix Group shares currently offer one of the highest dividend yields in the FTSE 100 index. Are they worth buying for income?

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Phoenix Group (LSE: PHNX) shares have taken a big hit this year. As a result, they currently offer a huge (11%+) dividend yield.

Are the shares worth buying for this monster yield? Let’s discuss.

A FTSE 100 company

Before I zoom in on the dividend here, it’s worth providing a quick overview of the business, as it’s not a well-known organisation.

A FTSE 100 company, Phoenix is one of the largest long-term savings and retirement businesses in the UK with around 12m customers and £270bn worth of assets under administration.

Phoenix has actually been around for about 240 years, growing steadily through a series of mergers and acquisitions (some of its more recent acquisitions include Standard Life and SunLife).

​Currently, it has a market cap of £4.6bn, meaning that it’s one of the smaller businesses in the FTSE 100 index.

Is the dividend yield for real?

As for the dividend, last year Phoenix paid out 50.8p per share to investors.

And analysts currently expect the group to pay out 52.6p per share for 2023.

At today’s share price, that equates to a yield of 11.6%, which certainly looks attractive.

However, super-high yields can’t always be trusted (if a yield looks too good to be true, it often is).

So, the question is – can we trust the payout here?

Well, one thing that can help answer that question is cash flow generation. To pay a dividend, a company needs to generate cash.

The good news here is that in its recent half-year results, Phoenix said it generated cash of £898m in H1, and that it’s on track to deliver cash of £1.3bn-£1.4bn for 2023.

This should be more than enough to cover the dividend. Last year, dividends only cost the company £496m.

This suggests that the dividend should be secure, in the near term at least.

Risk vs reward

Now, Phoenix Group shares do look cheap (the forward-looking P/E ratio is about six). This is another attraction of the stock.

However, there are a few risks to consider here. One is that rising interest rates could result in losses on the company’s balance sheet.

Financial services companies like Phoenix tend to own a lot of fixed income securities (bonds). And bond prices fall when interest rates rise.

Another risk is the company’s own debt.

It’s worth noting that in September, analysts at JP Morgan cut their target price to 500p from 655p and downgraded the stock to an ‘underweight’ rating from ‘neutral’ on the back of debt concerns.

We simply feel that the stock has too much debt leverage relative to peers, which creates numerous capital and growth risks in the long term,” they wrote.

This week, they’ve lowered their price target further to 430p.

A third risk is the fact that the shares are currently in a nasty downtrend. Where this trend ends, nobody knows.

Weighing everything up, I do think Phoenix Group shares look interesting right now. If I was an income investor, I might consider buying them.

However, I see them as higher-risk. Therefore, I wouldn’t be taking a big position here.

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.

Edward Sheldon has no position in any of the shares mentioned. 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.

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