Phoenix Group (LSE:PHNX) is among the highest-paying dividend stocks on the FTSE 100. Currently, the dividend yield sits at a huge 9.7%.
So, if I were to buy 1,000 shares in Phoenix Group at £5.42 a share, my investment would return £525 every year.
Moreover, Phoenix has a track record of increasing the dividend payouts. Payouts have increased by 3.6% last year and by 3.9% in 2022.
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So, let’s take a closer look at this dividend giant.
A business with momentum
In 2013, Phoenix had assets of £68.6bn. Today that figure stands £283bn. This has been achieved through acquiring large portfolios of life insurance policies. It’s a straightforward model that has proved very successful, bringing good cash flows and enabling a very strong dividend.
Key strategic moves have included the £3.28bn acquisition of Standard Life Aberdeen’s insurance arm in 2018, and the £3.25bn purchase of the ReAssure insurance book. Acquisitions have been smaller in recent years, such as the £248m acquisition of Sun Life UK in 2022, as the business transitions to more organic growth.
Going forward, management expects to generate about £4.4bn of cash through to 2026, with £3.7bn of operating cash flow. The insurer is aiming to achieve a Solvency II leverage ratio of 30% by the end of 2026, down from the current 36%.
Managing the transition
According to management, the £248m acquisition of Sun Life UK is expected to generate £470m of cash over the insurance book’s lifetime. This is reflective of the success the acquisition model has delivered in recent years.
As such, the shifting business model does pose some risks as it’s somewhat uncharted territory for the company. However, its acquisition spree couldn’t last forever, and broadly speaking analysts are positive about the change.
A move away from the M&A model should also provide some stability for investors with a focus on reducing debt and a progressive dividend policy.
Risk transfer beneficiary
There are also supportive trends within the sector that should aid this transition. Phoenix Group has leveraged a trend in the pension industry known as Pension Risk Transfer.
This process involves transferring a company’s pension liabilities to life insurers, allowing the company to eliminate the risk associated with pension deficits or surpluses and concentrate on its core business.
While Legal & General appears to be capturing a good share of the market, Phoenix isn’t too far behind collecting £6.2bn of premiums in 2023. The market is estimated to be worth £50bn annually and the company is planning to target pension schemes ranging from £500m to £2bn.
The dividend
Very few companies offer dividend yields anywhere near 10%. Phoenix Group’s 9.7%p yield is really exceptional. The company’s dividend coverage ratio may not be the strongest, but the dividend is sustained by strong cash flows and sustained business growth.
The bottom line on Phoenix Group
In addition to the attractive dividend, Phoenix Group shares trade at a 13.5% discount to the average share price target. While this is not always reliable, it could suggest that the share price will move upwards in the coming months.
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