The Phoenix (LSE: PHNX) share price dropped 10% last week. As somebody who holds the FTSE 100 insurer in a Self-Invested Personal Pension (SIPP), this should worry me, but doesn’t. That’s what share prices do. Sometimes they go up, sometimes they go down.
A big part of the latest move was down to the shares going ex-dividend on 25 September. On that day, Phoenix shares fell 4.51%. This happens because when a company pays a dividend, cash leaves the business. The share price usually drops by roughly the size of the payout. In this case, it was a big one, as Phoenix has a bumper trailing yield of 8.54%.
Returns are heavily skewed towards income, and this can act as a brake on share price growth. Phoenix Group Holdings, to use its full name, trades at similar levels to a decade ago. It’s been more active lately, rising 12% over the past 12 months and 22% over two years.
FTSE 100 dividend star
I’ve held Phoenix shares for two years and I’m pleased with the results, so far. I’m sitting on a capital gain of 18.5% and a total return of 37% once reinvested dividends are included. My next payout lands on 30 October.
With 871 shares and a dividend of 27.35p per share, I’ll collect £238. At today’s price of 633p, that will buy me another 36 shares. I should get a similar payment when the final dividend is declared next May. I’ll automatically reinvest that too.
That’s the beauty of compound returns. Even if the share price goes nowhere, investors could double their money in nine years simply by rolling up that yield. Of course, Phoenix has to generate plenty of cash to keep that going. The big question is whether the balance sheet can sustain it.
A closer look at the numbers
Latest results, published on 8 September, gave some reassurance. Half-year adjusted operating profit rose 25% to £451m, while operating cash generation climbed 9% to £705m. Management said it was firmly on track to meet medium-term targets.
The balance sheet also looked strong, with a Solvency II surplus of £3.6bn and a capital coverage ratio of 175%, close to the top of its 140%–180% target range. That suggests there’s still plenty of strength to support shareholder distributions.
Phoenix has lifted payouts at a modest average compound annual rate of 3.05% over the last decade. That pace may slow to nearer 2%, which isn’t spectacular. Yet with a yield this high, the priority’s maintaining the payout rather than turbocharging it.
Long-term case
The shares trade on a price-to-earnings ratio of 13.7, which looks reasonable value. There are risks though. Phoenix built its business buying and managing closed life and pension funds, which provides stability, but it also has to find new sources of income in competitive markets such as pension risk transfer. That won’t be easy, but it’s necessary to keep the cash flowing.
A broader concern is that global stock markets look expensive, and a correction would hit the value of Phoenix’s underlying assets. Yet with the yield so high and the balance sheet looking resilient, I think investors might consider buying Phoenix with a long-term view.
I’ll take advantage of any stock market volatility in October to buy more.
