I owned Lloyds (LSE: LLOY) shares long before I had even heard of Phoenix Group Holdings (LSE: PHNX). Like many people, I was unaware the insurance firm operated the powerhouse Standard Life and SunLife brands, among others.
Both stocks were selected using my standard stock screening process to identify new shares to buy. This looks at business growth potential, share valuation, and dividend yield.
The same process recently flagged that I should sell my Lloyds stock and buy more Phoenix Group shares, which I did.
Business growth potential
Lloyds’ 2023 results showed statutory profit after tax increased 41% — to £5.5bn from £3.9bn in 2022.
Analysts’ expectations are that earnings will grow by 0.8% a year to the end of 2026. Its earnings per share are forecast to increase by 5.2% a year to that point. Return on equity is projected to be 12.1% by then.
Phoenix Group posted a 2023 adjusted operating profit before tax of £617m – up 13% from 2022. After tax, it recorded a loss of £88m – a reduction of 64% from £245m the year before.
Analysts’ expectations are that its earnings will grow by 38.9% a year to the end of 2026. Its earnings per share are forecast to increase by 53.2% a year to that point. Return on equity is projected to be 25.1% by then.
A clear win for Phoenix Group in my view.
I also think there is less risk attached to it than with Lloyds. One is a deterioration in its hedging strategies to maintain its capital position. Another is a new financial crisis – also applicable to Lloyds.
A further risk for Lloyds is that earnings and profits are likely to fall as UK interest rates decline. Another major risk is possible legal action for mis-selling car loans through its Black Horse insurance operation.
Share valuation
Lloyds’ price-to-book (P/B) ratio is 0.7, against its peer group average of 0.6. So, it looks slightly overvalued on this measurement.
Phoenix Group’s P/B is 1.6, compared to a peer group average of 3.6. So, it looks very undervalued on this measurement.
Another clear win for Phoenix Group here, I think.
Dividend yield
Lloyds’ 2023 dividend of 2.76p a share gives a yield on the current 51p stock price of 5.4%.
Phoenix Group’s 2023 dividend of 52.65p a share gives a yield on the current £4.84 stock price of 10.9%.
The contrasting yields make a huge difference to my payouts over time if the dividends are reinvested in the stocks.
£10,000 invested in Lloyds at an average 5.4% will give me an investment pot of £50,348 after 30 years. This would pay me £2,641 a year, or £220 a month in dividends.
£10,000 invested in Phoenix Group at an average 10.9% will not result in just double the Lloyds amount. Or in triple, or quadruple either.
With the full effect of reinvesting dividends in play, I would have over five times the amount if I invested in Phoenix Group!
Specifically, £259,258 after 30 years.This would pay me £26,659 a year, or £2,222 a month!
So, another huge win for the insurance group here as well, making three out of three.
Consequently, I am extremely pleased with my decision to swap Lloyds for Phoenix Group and would do the same today.
