Phoenix Group (LSE:PHNX) is a FTSE 100 company with operations in the savings, insurance and pensions sector. It’s certainly not one of the most exciting sectors to operate in, but it’s one of the best sectors for dividends.
In fact peers, including Aviva, Direct Line, and Legal & General, all offer excellent dividends. And there’s a reason for this. These are mature business, primarily operating in mature — slow-growing markets — which favour rewarding shareholders rather than reinvesting in growth objectives.
Insurers are also well positioned to pay these dividends due to the nature of their operations and cash flows. For example, premiums — the money we pay for our insurance policies — are normally paid monthly. That gives these companies a reliable and regular source of income. It also means they normally have the cash on hand to stick to their dividend policies.
The business
Phoenix Group is the biggest dividend payer out of the aforementioned insurance stocks. The 9.95% dividend yield has actually fallen from around 11% as the share price has risen in recent months.
All in all, Phoenix has some 14m policyholders. The number surged when the business was expanded through the acquisition of wealth management arm Phoenix Wealth (formerly AXA Wealth), in addition to the Standard Life brand name, SunLife and ReAssure, a few years ago.
It’s also slightly different from its peers in that, traditionally, the company has pursued a business model whereby it acquires and manages closed products until maturity.
Dividend strength
Phoenix Group has a dividend coverage ratio of 1.6 times. That means the company can afford to pay its stated dividends 1.6 times from net income. Normally, a ratio of two is strong.
This would allow a firm to experience significant earnings pain without having to cut the dividend payments.
I do make something of an exception for insurers with regards to having a coverage ratio below two. That’s because, as noted above, cash flows are stable and reliable.
Some investors may be concerned to see that coverage has fallen from 1.93 in 2020, to 1.62 in 2021, and 1.6 in 2022. However, improving earnings will turn this around.
The bottom line
Equally, some investors may be concerned by the size of its debt, although management claims it’s operating with optimal leverage.
However, while the UK and Canada are by no means fast-growing markets, there are several tailwinds that can help the business in the near term. This includes an improving financial environment, with interest rates falling and more money returning to equities.
I’d also expect Phoenix Group to practice a hedging strategy which allows it to benefit from buying fixed rate assets. And with just 15% of the UK’s defined benefit pension liabilities have been transferred to insurers, there are tailwinds in bulk purchase annuities.
So while this stock hasn’t been an investor favourite, the strong dividend, and a few tailwinds, make Phoenix an attractive proposition. If I did have the capital available, I’d top up my position.
