The FTSE 100’s Phoenix Group Holdings (LSE: PHNX) has consistently been one of my highest-yielding stocks.
Like many of my share purchases over the years, I bought it when it was deeply out of favour with many investors. And like all my stock buys, I obtained it at a deeply discounted price to what I assessed as its fair value.
Both factors – an extremely high yield and a very undervalued share price – are still in play.
On top of this, analysts forecast the firm’s earnings will rise by a stunning 74% each year to end-2027. And it is precisely this growth that drives a stock’s price and dividends higher over time.
How does the core business look?
A risk to Phoenix Group’s future earnings is the high level of competition in the savings and retirement sector.
Nonetheless, its 2024 results released on 17 March showed IFRS adjusted operating profit rose 31% year on year to £825m. This was way ahead of analysts’ expectations of £734m.
Over the same period, its operating cash generation jumped 22% to £1.403bn. The firm stated that this more than covers recurring uses, including its progressive dividend policy. This is where a dividend is expected to rise at least in line with increases in earnings per share. However, if this falls, the dividend will not be reduced.
Moreover, its £1.779bn total cash generation easily overshot the top end of its previous £1.4-£1.5bn 2024 target range.
Consequently, Phoenix Group upgraded its total cash generation target to £5.1bn from £4.4bn by end-2026. It did the same for its IFRS adjusted operating profit – to around £1.1bn from £900m by the same point.
How undervalued do the shares look to me?
Despite a recent rise in price, Phoenix Group shares still have the lowest price-to-sales ratio of its competitor group. They are currently at just 0.3 compared to their competitors’ 1.5 average.
This group comprises Aviva at 0.7, Legal & General at 1.2, Swiss Life Holding at 1.9, and Prudential at 2.4.
To determine where its price should be, based on future cash flow projections, I ran a discounted cash flow analysis. Using other analysts’ figures and my own, this shows Phoenix Group is 27% undervalued at £5.73.
So the fair value for the stock is £7.85, although market forces could move it lower or higher.
Set to be an even greater passive income powerhouse?
The firm raised its dividend in 2024 to 54p, which yields 9.4% on the current share price.
However, analysts forecast the payout will rise to 55.6p in 2025, 57.4p in 2026, and 58.9p in 2027. These would generate respective yields of 9.7%, 10%, and 10.3%.
Ignoring these projections and using only the current yield, investors considering a £10,000 holding in the firm would make £15,506 in dividends after 10 years. After 30 years on the same average 9.4% yield, this would rise to £155,935.
Adding in the initial stake and the Phoenix Group holding would be worth £165,935. This would pay £15,598 in dividend income a year at that point.
These numbers are also based on the dividends being reinvested back into the stock – known as ‘dividend compounding’.
Given these factors, I will be buying more of the shares very soon.
