A 9%+ yield but down 8%! Time for me to buy more of this hidden FTSE 100 gem?

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

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FTSE 100 insurer Phoenix Group Holdings (LSE: PHNX) recently raised its annual dividend to 52.65p a share, from 2022’s 50.8p. This gives a yield on the current £5.50 share price of 9.6%.

It remains one of the very few shares in the leading index that pays an annual return of over 9%. By comparison, the average current yield of the FTSE 100 is 3.8%.

So, £10,000 invested now in Phoenix Group would make me £960 this year in dividends. If the yield averaged the same over 10 years, then I would make £9,600 to add to my £10,000 investment.

Crucially however, if I reinvested those dividends back into the stock, I could make an additional £16,017 instead! This would give me £26,017 in total, paying me £2,373 a year in dividends, or £198 a month.

Over 30 years on an average 9.6% yield, I would potentially have £176,113, paying me £16,060 a year, or £1,338 a month!

Is the high yield sustainable?

In 2023, Phoenix Group built a cash pile of over £2bn, exceeding its already-upgraded target of £1.8bn. New business long-term cash generation was just over £1.5bn, achieving its 2025 target two years early.

This should allow it to keep paying high dividends in the coming years. It should also be a major engine for continued high growth.

Last year saw its Pension and Savings business grow 27% compared to 2022, and new business net inflows jumped 72% to £6.7bn.

The firm now expects operating cash generation to rise by around 25% to £1.4bn in 2026. It is also targeting a £900m IFRS-adjusted operating profit by that year.

Consensus analysts’ expectations are for earnings to grow 41% a year to end-2026. Earnings per share are also expected to increase 54% a year to that point.

One risk for Phoenix Group remains a new global financial crisis. Another is a deterioration in the recent major improvement in its hedging strategies for its capital position. However, both are somewhat mitigated by the huge cash war chest and by its continued high growth, in my view.

Undervalued shares?

Despite a recent rise in price after its strong 2023 results, the stock is still down 8% from its 12-month high.

I think it now looks very undervalued against its peers. This means to me that there’s a reduced chance my dividend gains will be wiped out by share price losses, not that this can be guaranteed.

Specifically, Phoenix Group trades at just 1.8 on the key price-to-book (P/B) measurement of stock value. This compares to a peer group average of 3.7.

On the equally important price-to-sales (P/S) valuation, it also looks undervalued compared to its competitors. It trades at just 0.3 – the lowest in its peer group, the average valuation of which is 1.6.

Will I buy more?

I will be buying more Phoenix Group shares very shortly for the three key reasons analysed in depth above.

But to reiterate, the very high yield looks to me like it will continue, generating significant passive income in the years to come.

Plus I think the business shows all the signs of continuing to grow stronger. And despite the recent price rise, the stock still seems to be undervalued.

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 Phoenix Group Plc. The Motley Fool UK has no position in any of the shares mentioned. 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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