2024’s been a terrific year for UK shares, so far. The British stock market has generated double-digit total returns since January, far exceeding its usual annual performance. Yet, not every stock in the leading indices has been so fortunate.
Looking at the FTSE 100, the UK’s flagship index is up nearly 10% since the start of the year. Yet Phoenix Group Holdings (LSE:PHNX) has remained basically flat. With these shares being left behind and dividends being maintained, shareholders are now reaping a staggering 9.6% yield.
That’s a lot of passive income potential. So it’s not too surprising to see the stock on Hargreaves Lansdown‘s most-bought stocks list. Yet, after digging a bit deeper, I’m not convinced this is a screaming buying opportunity. Let’s take a closer look.
The bull case
Phoenix’s story’s an interesting one. The insurance company started as a modest enterprise going up against industry titans like Legal & General.
Yet despite fierce competition, management was able to carve out its own niche in life insurance policies. And after a decade of capitalising on such opportunities, the firm’s assets under management surged into the hundreds of billions of pounds, placing the company inside the FTSE 100.
Today, it continues to be a cash-generating machine. In fact, as per its latest results, the insurance group is on track to hit nearly £1.5bn in total cash generation. That’s terrific news for income investors since it’s more than enough to cover the expected full-year dividend of roughly £500m.
In other words, despite high yields often being a warning sign of unsustainability, Phoenix Group appears to be an exception.
A word of caution
Given management’s positive outlook for cash generation, earnings and solvency, it begs the question as to why the share price hasn’t been moving up. The answer is uncertainty.
Phoenix Group’s long-time CFO’s stepping down after 23 years, and the company’s executing a complete overhaul of its insurance strategy. The tactics used to date have been incredibly successful, but the company appears to have reached a large enough size where they’re simply not effective anymore.
The loss of a key strategist on the board, as well as a shift in direction, has given a lot of investors some pause. After all, this is the first time Phoenix has stepped out of its comfort zone. It’s not clear whether it can beat larger firms at their own game.
The company has defied expectations in the past, which fills me with cautious optimism. But it’s not enough for me to consider an investment at this time despite the attractive yield. Therefore, I’m keeping Phoenix on my watchlist for now and turning my attention to hunting down other cheap UK shares whose futures are more certain.
