Down 16%! Time for me to buy more of this 10%-yielding FTSE 100 hidden gem?

This FTSE 100 stock met its huge cash generation target two years early, has one of the highest yields in the index, and looks set for strong growth.

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FTSE 100 insurer Phoenix Group Holdings (LSE: PHNX) flashed on my investment radar early last March. It was dropping like a stone, along with similar UK financial firms.

This stemmed from fears of another global financial crisis caused by the failures of Silicon Valley Bank and Credit Suisse.

I owned shares in several financial sector firms, including M&G, Legal & General and Aviva, so added to my holdings.

The sector’s attraction for me

Why? For four key reasons. First, the fears overlooked the huge capital-boosting measures ordered by the UK authorities following the 2007 Great Financial Crisis. This meant all these firms now had key Solvency II ratios of over 200%, while 100% is the regulatory standard.

Second, I’d thought even before then that the entire UK financial system had been unduly marked down following the 2016 Brexit vote. The markets commonly see such firms as proxies of their country’s economic prospects.

Third, a stock’s yield increases as its share price falls, which meant they were all offering big dividend payouts.

Fourth, these businesses tend to have very high cash flow upfront from monthly premiums and similar. This meant that their ability to keep paying these high dividends was very good indeed in most circumstances.

Why this company as well?

I bought Phoenix Group because, to me, it ticked all these boxes. Frankly as well, it was an oversight on my part that I hadn’t bought it before.

To be equally candid, I’d barely even heard of it. Like many people, I suspect, I didn’t know that it operates the giant insurance brands Standard Life and SunLife.

I also had no idea that even among these high-cash-flow-generating stocks it was a titan. An unscheduled trading update on 1 February showed around £1.5bn of new business long-term cash generation delivered last year. 

This meant it had achieved its £4.5bn 2023-25 cash generation target two years early. This huge cash war chest means the company should be able to keep paying high dividends with ease. It can also be a major driver for growth going forward.

Analysts’ expectations are that its earnings and revenue will respectively increase by 73% and 28% annually to end-2026.

No stock is without its risks, and one of these for Phoenix Group is another genuine global financial crisis. Another is poor hedging of its capital position in the past two years that led it to record post-tax losses.

For me though, both its huge capital pile and its strong earnings growth mitigate these risks to varying degrees. And vitally, its ability to pay very high dividends has not been impaired to date.

So, will I buy more?

Sometimes, oversights can work in an investor’s favour, as one did for me here. My relative lack of knowledge about the firm enabled me to buy it at a bargain-basement price after March 2023’s mini-crisis.

Consequently, even if the share price drops significantly, I will still be in profit on it. Also, any drop will push up the yield from its current 10% a year level.

Given my already winning position, I won’t be tempting fate and buying more right now. If I didn’t have it, though, I would undoubtedly buy the stock for its high yield and strong business prospects.

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.

Simon Watkins has positions in Aviva Plc, Legal & General Group Plc, M&g Plc, and Phoenix Group Plc. The Motley Fool UK has recommended M&g Plc. 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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