A 10%+ yield but down 12%! Is this hidden FTSE 100 gem an unmissable passive income opportunity?

This FTSE 100 stock has one of the highest yields in the index, appears undervalued against its competitors, and looks set for strong growth.

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Phoenix Group Holdings (LSE: PHNX) does not attract the attention it merits as a giant FTSE 100 insurance firm, in my view.

I think this is because many people do not realise it owns famous brands such as Standard Life and SunLife.

I did not either, incidentally, until my stock screener started flashing green early last March, indicating I should buy it.

The reason was that it was yielding over 10% — one of the highest payouts in any FTSE index. This is key for me, as I want a high-yield portfolio that allows me to keep reducing my working commitments.

The stock also looked very undervalued against its peers to me. This is important as well, as it reduces the chance of a big price fall wiping out my dividend gains.

And the final part of the buying equation for me was that the firm looked set for strong growth. Both share price and dividend returns are likely to keep rising over time if a company is growing robustly.

My up-to-date analysis shows where the stock currently is on each of the three key criteria.

Huge passive income generator?

With a 2023 dividend of 52.65p a share, the current £5.15 share price gives a yield of 10.1%. By comparison, the average current yield of the FTSE 100 is 3.8%.

So £10,000 invested now in Phoenix Group would make me £1,010 this year in dividends. If the yield averaged the same over 10 years, I would make £10,100 to add to my £10,000 investment.

Crucially, if I reinvested those dividends back into the stock, I could make an additional £17,340! This would give me £27,340 in total, paying me £2,616 a year in dividends, or £218 a month.

Over 30 years on an average 10.1% yield, I would have £204,364, paying me £19,555 a year, or £1,630 a month!

Set for strong growth?

None of that is guaranteed, of course, and I could lose money as well as make it. A new financial crisis does remain a risk for the stock. Another is a marked deterioration in its strategies to hedge its capital position.

However, in 2023 Phoenix Group built a cash pile of over £2bn, exceeding its already-upgraded target of £1.8bn. This can be a huge driver for business growth and continued high dividends.

High growth was also seen in its Pension and Savings business — up 27% year on year. And new business net inflows soared 72% over the period — to £6.7bn.

The company forecasts that operating cash generation will rise around 25% to £1.4bn by the end of 2026. It also targets £900m in IFRS-adjusted operating profit by that point.

Consensus analysts’ expectations are for earnings to grow 39% a year to end-2026. Earnings per share are projected to rise 53% a year up to that point.

Undervalued?

Phoenix Group trades at just 1.7 on the key price-to-book (P/B) measurement of stock value. This looks very undervalued compared to its peer group average of 3.5.

The same applies to the equally important price-to-sales (P/S) valuation. It trades at the lowest in its peer group by a long way– just 0.3 against the average of 1.5.

So, all three of my key buying criteria still hold good, in my view. This is what makes it an unmissable opportunity for me, which is why I am buying more.

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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