FTSE life insurer Phoenix Group Holdings (LSE: PHNX) first began flashing strongly on my personal stock screener early last March.
The reason was that the share price was falling fast, losing 12% of its value from 9 March to 20 March alone. Because a share’s yield rises as its price falls, this drop meant Phoenix Group was paying 9% at that point.
Around a year before, the FTSE 100 had finally recouped all the losses it had made during the Covid period. In my mid-50s, I decided I never again wanted to wait for growth shares to recover from any future disaster.
That was also around the time when developed market bond yields began to rise. 10-year UK government bonds offered a 4%+ yield with no risk attached. (The ‘risk-free rate’ is the 10-year government bond yield of the country in which an investor lives).
I could also get 6.2% from the UK government-backed National Savings & Investments Guaranteed Income Bonds. There was no risk to holding these bonds either.
So, I set my stock screener to identify shares paying 8% or more a year in dividends. This meant a 1.8% ‘charge’ for the additional risk of investing in stocks.
This was the minimum I required for effectively supporting a company with my money.
Clearly, as more people invest in a stock, the higher the share price goes. And the higher the share price goes, the better able generally a company is to conduct its business.
This includes securing better credit ratings in the long term, which in turn secures cheaper funding and more favourable handling by its banks.
A high yield alone is never sufficient for me to invest in a company, though. I also look for a strong core business, with high earnings growth prospects over the next few years.
Core business strength
Phoenix Group posted an H1 adjusted operating profit before tax of £266m, up from £254m in the same period the year before.
After tax, it made a loss of £245m, compared to a £1.258bn loss in H1 2022. But the losses primarily arose from adverse market moves against investments taken to hedge its capital position.
A risk here remains high volatility in financial markets. Another is that inflation pushes insurance premiums up and prompts customers to cancel policies.
The H1 2023 results also showed a 106% year-on-year increase in incremental new business long-term cash generation — to £885m.
On 13 November, it upgraded its 2023 cash generation target to £1.8bn, against the previous £1.3bn-£1.4bn.
It also boosted its cash generation target from 2023 to 2025 to £4.5bn, from the earlier £4.1bn.
This huge cash war chest is a massive resource to drive business growth.
Indeed, analysts’ expectations now are that earnings and revenue respectively increase by 73.2% and 27.6% a year to end-2026. Earnings per share is expected to grow by 62.6% a year over the same period.
As for whether I will add to my existing holdings in Phoenix Group, the answer is a resounding yes.
Its yield is still one of the highest in the FTSE 100, which remains a baseline consideration for me. I also see a lot of value left in the share price, driven by very high growth prospects.
