Why did the Phoenix Group share price jump 7% last week?

Phoenix Group is a large-cap FTSE 100 insurance stock with a share price that saw some solid gains last week. This Fool is on a mission to find out why.

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Last Friday (3 May), the Phoenix Group (LSE: PHNX) share price shot up from £4.90 to £5.26, representing a 7.35% rise. The sudden movement follows a pattern of volatility that the share price has exhibited throughout this year. In late March, it made a sudden jump from £4.76 to £5.55 before falling back down just as quickly a few days later.

So what prompted this latest increase and will it continue?

Risk reduction

Phoenix Group isn’t exactly a household name, despite a £5.18bn market cap and 167 years in business. Most likely that’s because few people know it’s the parent company of well-known brands Standard Life and SunLife. These are both major insurance firms that serve a decent chunk of the local and international market. 

However, the firm is better known in investing circles, largely due to its high dividend yield.

One possible reason for the share price increase last Friday was the announcement of early redemption on all the company’s £250m fixed rate tier 2 subordinated notes, due in 2029. In basic terms, this means it’s paying back these riskier (tier 2) types of loans before they mature (or the interest rate increases). This could in part reduce certain risks associated with investing in the stock.

So is now a good time to buy? I’m not so sure.

Where’s the money coming from

With a 10.3% yield, Phoenix Group looks like a no-brainer addition to a dividend portfolio – at first glance. But there are some concerns. The group recently increased its interim dividend to 26p, making its full-year dividend-per-share 53.3p. My concern is how it will continue to pay this dividend, especially considering it has negative earnings.

I can’t fault its track record. It’s been making consistent and reliable dividend payments for the past 10 years. But that doesn’t guarantee it will continue. Not only does it have limited cash flow, its debt of £6.18bn far outweighs its equity of £3.54bn, leaving it with a debt-to-equity ratio of 174%. Assets and liabilities are on par and interest coverage is minimal at 2.3 times, so where’s the dividend money coming from?

My verdict

While the company’s share price is down 10% in the past year, there’s consensus among analysts that things are improving. Earnings grew through 2023, bringing earnings per share (EPS) up from a negative £2.74 to a loss of just £0.13. Analysts now forecast the stock to become profitable in 2025, with future return on equity (ROE) expected to be around 25% in three years.

This clarifies two things: yes, the share price could start improving this year but this rally is probably not where it starts.

Personally, I’d love to rake in the returns of a 10% dividend yield, as I’m sure any investor would. But I can’t ignore the risks present in Phoenix’s balance sheet and income statement. Despite the solid track record, I just don’t see enough evidence to suggest dividend payments will continue uninterrupted. And if the share price continues to decline, it would negate the dividend returns anyway.

As a risk-averse investor, I’d need more concrete proof of stability and growth before I invest in the stock.

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.

Mark Hartley has no position in any of the shares mentioned. 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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