FTSE 100 insurer Phoenix Group Holdings (LSE: PHNX) has seen its shares drop 22% from their 12-month 9 March high.
This looks like a great buying opportunity for me.
Impact of accounting changes
H1 2023 results showed adjusted operating profit before tax of £266m, up from £254m in H1 2022.
However, following industry-wide adoption of IFRS17 accounting procedures on 1 January 2023, Phoenix Group recorded a post-tax loss of £245m.
IFRS17 seeks to establish that accounts reflect the timings of cash flows and any uncertainty relating to insurance contracts. In Phoenix Group’s case, this loss mainly arose from adverse market moves against investments to hedge its capital position.
Consequently, I will be looking to see how effectively the company manages its risk hedging from here. A 10% or so increase in post-tax losses in the H2 results would cause me to put it under review in my portfolio.
Business looks to be on a strong uptrend
However, an unscheduled trading update on 1 February showed around £1.5bn of new business long-term cash generation being delivered last year. This meant it had achieved its £4.5bn 2023-25 cash generation target two years early.
Such a huge cash war chest can be a major driver for growth going forward.
The update also showed new 2023 business net fund flows increasing by about 80% — to £7bn.
Consensus analysts’ expectations are now that its earnings and revenue will respectively increase by 68% and 28% annually to end-2026.
Forecasts are also for earnings per share to grow 77% a year to the same point.
Stellar dividend payer
This business strength indicates to me that the company will continue to pay very high dividends.
In 2022, it paid a total of 50.8p. Based on the present share price of £5.05, this gives a yield of just over 10%.
Only a handful of FTSE 100 stocks yield around this ‘magic’ 10% level. It is magic because a 10% dividend return averaged over 10 years means investors double their investment.
This is without any reinvestment of these dividends. Reinvesting the dividends back into Phoenix Group stock provides much higher returns.
For example, £10,000 invested now in the stock will give me £25,937 after 10 years, based on an average 10% yield.
On the same basis, after 30 years the initial £10,000 would have grown into a total investment pot of £174,494. This would pay me £15,863 a year in yield, or £1,322 each month in passive income.
Undervalued against its peers
Obviously, I do not want these dividend gains eroded by share price losses. So, working out whether a stock is undervalued compared to its peers is important to me.
Using the core price-to-book (P/B) measurement, I see Phoenix Group is trading at 1.5. Just Group is at 0.7, Chesnara at 1.2, Prudential at 1.8, and Legal & General at 3.
This gives a peer group average of 1.7. On this basis, Phoenix Group looks undervalued against its competitors.
I already have shares in the company but will be buying more very soon for three key reasons.
First, the business looks to me like it is going from strength to strength. Second, the shares still look undervalued against their peers. And third, the yield is just impossible for me to pass up.
