Even with the stock market trending back in the right direction in recent weeks, plenty of FTSE 100 companies are still offering seemingly terrific dividend yields. And this month, the most lucrative payout belongs to Phoenix Group Holdings (LSE:PHNX) with an 11% yield.
However, as exciting as the prospect of adding a double-digit dividend return to an income portfolio Is, there’s cause for concern. So, let’s explore whether this yield is too good to be true or is secretly a terrific buying opportunity for long-term investors.
A secret financial darling?
As a quick reminder, Phoenix Group is a financial institution specialising in creating products for long-term savings and retirement. This includes solutions such as pension accounts and life insurance policies. Operating under numerous brands, the firm caters to around 12 million customers with £269bn of assets under administration as of June 2023.
Looking at the latest interim results, performance seems to be chugging along nicely. New business long-term cash generation jumped from £430m to £885m year on year, while net fund flows surged from £1.8bn to £3.1bn. In other words, Pheonix is having little trouble attracting new customers. And with such impressive cash flow generation, it appears to have sufficient resources to cover its dividend payments more than three times over.
Needless to say, this makes the stock’s 11% dividend yield quite an attractive prospect. However, despite this seemingly strong performance, the share price tells quite a different story. Over the last 12 months, it’s actually down over 20%, contributing to the high yield. So, what’s going on?
Poorly timed acquisition
As part of its operations, Phoenix regularly makes investments in a wide range of markets, including private equity. In September, it acquired a 5% stake in Hambro Perks, a UK-based venture capital firm. Considering higher interest rates have dragged down valuations across the board, it appeared that management was capitalising on a buying opportunity.
Unfortunately, the timing couldn’t have been worse. Why? Because only a few days later the Financial Conduct Authority (FCA) announced it was launching a broad investigation into valuations within the private equity markets. Depending on the findings of this enquiry, Phoenix’s activities within the markets might be severely hampered in the future.
Needless to say, that adds a lot of uncertainty into the mix. So, it’s not surprising that the share price tumbled almost 20% in the weeks that followed.
A buying opportunity?
With the underlying business continuing to perform admirably, there’s an argument to be made that this volatility has created a buying opportunity. And considering the cash generation makes the dividend look sustainable, I’m not too concerned about a looming dividend cut.
However, the uncertainty surrounding the FCA investigation presents a problem. Even if management maintains dividends, regulatory interference could continue to send the share price in the wrong direction, offsetting any passive income gains. Personally, I’m keeping Phoenix on my watchlist until further clarity has been provided.
