A 10.6% yield but down 40% over 5 years! Time for me to buy more of this hidden FTSE 100 gem?

This insurance giant pays one of the highest dividends in the FTSE 100, has strong business growth prospects, and looks very undervalued to me.

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I bought FTSE 100 insurer Phoenix Group Holdings (LSE: PHNX) last March after it started flashing green on my personal stock screener.

Until then, I had not realised that it operates some of the biggest insurance brands, including Standard Life and SunLife.

My screener had alerted me that the company was yielding over 10% following a big price fall. A high payout is key for me, as I want to maximise my passive income so I can further reduce my working commitments.  

The buy signal also factored in the company’s strong growth prospects and an apparent undervaluation to its peers.

The first point is important as rising earnings power dividends over time. The second is crucial as it reduces the chances of dividend gains being wiped out by sustained share price falls. 

My end-of-month check on my core stocks shows all three factors still hold good.

Undervalued?

The share is down about 40% from its 23 November 2020 five-year traded high of £8.21. This is largely due to the broad-based devaluation of UK financial stocks after the 2016 Brexit decision, in my view.

Such a fall does not necessarily mean it is undervalued. It might be that the company is simply worth less than it was before.

To ascertain which is true here, I looked at the key price-to-book ratio (P/B) of stock value. Phoenix Group trades at just 1.6 against a peer group average of 3.5, so is undervalued on this measurement.

The same applies to its valuation of only 0.2 against a peer group average of 1.5 on the price-to-sales (P/S) measure.

Strong business growth prospects?

Last year, it built a cash pile of over £2bn, exceeding its already-upgraded target of £1.8bn. This can be a huge driver for business growth.

Its Pension and Savings business also recorded high growth — up 27% year on year. And new business net inflows soared 72% over the period — to £6.7bn.

Phoenix Group is now targeting £900m in IFRS-adjusted operating profit by the end of 2026.

A primary risk here is a deterioration in its strategies to hedge its capital position. Such hedging involves trading other assets with the intention of reducing the risk of adverse market movements on its capital.

However, consensus analysts’ expectations are for earnings to grow 38.9% a year to end-2026.

Big passive income generation?

£10,000 invested in Phoenix Group shares with the current yield of 10.6% would make £1,060 each year. Over 10 years, this would total £10,600.

However, if the dividends were reinvested back into the stock – known as ‘dividend compounding’ — these returns would increase massively.

Specifically, doing this would give an additional £18,730 after 10 years instead of £10,600, provided the dividend averaged 10.6%! The total would be £28,730, paying £2,877 a year in dividends, or £240 a month.

After 30 years on the same average dividend, the total would be £237,133! This would pay £23,750 a year, or £1,979 every month in passive income!

So, my end-month check confirms that it still has one of the highest yields in the FTSE 100. Its growth prospects also look excellent to me, and it still appears very undervalued against its peers.

Consequently, I will be buying more of the shares very soon.

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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