Financial services group Phoenix (LSE: PHNX) has only been a public company for 10 years, but during this time the business has already established itself as one of the best income stocks in the FTSE 100.
A different business
Phoenix is a relatively unique business. The company buys books of closed life insurance policies and pensions from other investment managers to manage them through runoff. Phoenix is the most significant life and pensions consolidator in Europe, currently looking after 10m policies and £245bn of assets under administration.
Sellers are happy to offload their liabilities in this way because life insurance can consume a lot of capital, and these policies are quite challenging to manage.
Phoenix benefits because the company can use its economies of scale to push down costs and, hopefully, if management has got its calculations correct, generate a profit on the runoff of the policies.
Majority of this profit is then returned to investors via dividends. Over the past six years, the company has paid out between 41p and 47p per share per annum. The current dividend yield stands at 6.2%.
I believe this trend is almost certain to continue. Over the past decade, Phoenix has proven to the market and regulators that it can manage these policies through run-off successfully, and providers are flocking to the company’s offload their liabilities.
According to the company’s most recent trading update, it has signed £1.1bn of bulk purchase annuity agreements so far in 2019.
A great example of how Phoenix can reduce costs and unlock cash from the liabilities acquired is its deal with Standard Life Aberdeen.
In September 2018, the financial services group completed its £3.3bn acquisition of Standard Life Aberdeen’s insurance arm. This one deal more than trebled the assets of Phoenix at the time.
The company initially believed it would be able to achieve cost synergies of £720m from the deal, but this has now been increased to £1.2bn, mostly thanks to changes to IT systems and processes. Lower costs have translated into higher levels of cash generation for the Phoenix group.
The company now believes it will generate £707m of cash in 2019, at the upper end of its targeted range of £600m-£700m published at the beginning of the year. This cash generation should help support the group’s dividend payout, as well as strengthening its balance sheet.
Not that its balance sheet is weak. At the end of September, the company had a Solvency II surplus of £3bn and a Shareholder Capital Coverage Ratio of 156%, which shows us that the business has more than enough capital to operate and return cash to investors without having to worry about a cash crunch.
The bottom line
So that’s why I’d buy FTSE 100 dividend champion Phoenix group for my ISA if I had £5,000 to invest today. Not only is the company of FTSE 100 income champion, but it also has bright growth prospects as the firm continues to consolidate the European life insurance and pension market.
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Rupert Hargreaves owns shares in Standard Life Aberdeen. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.