Quite a few FTSE 100 shares appear to offer high dividend yields, based on forecast data. But many of these payouts have been cancelled or suspended. Today I want to look at a FTSE 100 stock with an 8% dividend yield that looks very safe to me.
You may not be familiar with Phoenix Group Holdings (LSE: PHNX). But this £4bn FTSE 100 firm is set to become the UK’s largest life insurance and pension provider when its acquisition of rival ReAssure completes later this year.
This FTSE 100 share is a hidden high-yield hero
Unlike better-known rivals such as Aviva or Legal & General, Phoenix specialises in buying up life insurance and pension policies from other firms, which want to offload them from their books.
Phoenix then benefits from economies of scale and its specialist focus to cut costs and generate a lot of surplus cash. Much of this is returned to shareholders through a generous dividend.
For example, in 2019, the company’s operations generated £707m of cash. About £338m of this will be returned to shareholders through the dividend. That gives this FTSE 100 share a yield of more than 8% at current levels.
Cash generation is expected to rise to between £800m and £900m in 2020. The dividend is also expected to increase.
Won’t the business run out of opportunities?
Phoenix’s business model relies on buying large ‘books’ of existing policies. Eventually, all of these will expire. In theory, this could lead to the business being wound down. But I think this is very unlikely, for two reasons.
The first is that demand for Phoenix’s services is expected to remain strong. Other insurers and pension providers are keen to transfer older policies to Phoenix, because this frees up capital for them to invest in new growth opportunities.
The second reason why I’m bullish on the long-term prospects for this FTSE 100 share is that Phoenix also sells new insurance and pension policies through a deal with Standard Life Aberdeen. This part of the business is being used to generate growth to offset the decline of older ‘closed book’ policies.
Phoenix wrote £7bn of new business in the UK and Europe last year. This is expected to contribute an extra £475m to long-term cash generation.
Why I’d buy this FTSE 100 share today
Phoenix is quite a specialist and complex business. But it’s also very focused and has a strong track record of delivering on its targets. This gives me confidence that the firm’s performance should continue to be sustainable.
In my view, the dividend is likely to be one of the safest in the insurance sector. Unlike most FTSE 100 rivals, Phoenix won’t have to handle any claims for home, travel or business interruption insurance as a result of the coronavirus pandemic.
Indeed, the long-term nature of its activities suggests to me that the pandemic shouldn’t have much effect on the firm’s performance at all.
The Phoenix share price has fallen by about 30% in this year’s stock market crash. That’s left the shares trading on eight times forecast earnings, with a dividend yield of 8%. I think this FTSE 100 stock is a good buying opportunity for income investors.
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Roland Head owns shares of Aviva. 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.