The dividend forecast for Phoenix Group (LSE: PHNX) shares is unbelievably high at the moment. Currently, analysts expect a payout of 53.9p per share this year and 55.5p next year. So, at today’s share price of 505p, we’re looking at yields of a whopping 10.7% and 11%.
Can these forecasts be trusted? Are shares in the UK insurance and savings company risky? Here are a few things investors need to know about Phoenix Group and its enormous dividend.
Low dividend coverage
There are certainly some red flags in relation to Phoenix’s dividend payout.
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Currently, dividend coverage (the ratio of earnings to dividends) here is in negative territory, meaning that earnings won’t cover dividends in the near term.
For 2024, earnings per share are forecast to come in at 46.5p. So, we’re looking at a ratio of 0.86.
This doesn’t necessarily mean that the dividend payout is unsustainable. But it’s not ideal. Generally speaking, a ratio under 1.5 is a warning that a dividend payout may not be safe.
Another red flag is the yield itself. When a company has a really high yield like Phoenix Group does, it’s often a signal that the market doesn’t believe it’s sustainable (the ‘smart money’ has dumped the stock pushing the yield up temporarily).
So, there’s some uncertainty in relation to future payouts here, in my view.
Plenty of cash flow
The good news is that Phoenix Group is generating plenty of cash flow today. And cash flow is a crucial ingredient in dividends.
In the first half of 2024, the group generated total cash of £950m. And it recently advised that it’s on track to generate cash of £1.4bn-£1.5bn for the full year.
Last year, dividend payments only cost the company a total of £520m. So in theory, there should be enough cash to handle the current dividend forecast.
Is this a risky stock?
As for the overall risk level of the shares, that’s hard to assess.
The shares do look quite cheap today. Currently, the price-to-earnings (P/E) ratio is just 10.8.
But here’s the thing – the shares have looked cheap for years and still gone backwards. Over the last three years, the stock has lost about 25% of its overall value (offsetting gains from dividends).
Share price performance over the longer term has been quite poor too. Over the last 10 years, the share price has declined.
The company does have a three-year plan to boost performance. And management is confident that it’s building a growing business that’s on track to create shareholder value.
However, there’s quite a bit of debt on the balance sheet (£3.7bn in borrowings at the end of H1). This adds risk.
Another risk is that the Financial Conduct Authority (FCA) recently launched a market study into sales of ‘pure protection insurance’ products following concern that the design of some commission structures could lead to poor outcomes for policyholders. As a result of this, Phoenix stopped the sale of its SunLife business, stating that the uncertainty around commissions was a concern for potential purchasers.
Putting this all together, it’s clear that investors need to weigh risk and reward here. While the yield is high today, I feel there’s no guarantee that overall returns from the shares will be strong in the years ahead.
