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In terms of dividends, insurer Phoenix Group (LSE: PHNX) is among the huge beasts within the FTSE 100. Its mammoth 9.9% dividend makes it among the many most profitable FTSE 100 dividend shares. In terms of share value motion, although, Phoenix is extra underwhelming.
Over the previous 5 years, for instance, it has moved up simply 3% — but throughout that interval, the FTSE 100 index has soared 55%.
5 years in the past the market was nonetheless in the midst of pandemic turmoil and which may be an element within the hole. However even over a one-year timeframe, the Phoenix share value has underperformed relative to the index. Phoenix has fallen 1% up to now 12 months, whereas the FTSE 100 has moved up 5%.
What’s going on – and would possibly it nonetheless make sense for an investor to contemplate Phoenix regardless of its underwhelming share value efficiency?
A excessive dividend may be enticing, but additionally scary
Maybe counterintuitively, I feel a part of the problem for Phoenix may truly be its dividend.
Which will sound odd, however when an organization has a excessive yield, it might typically make traders fearful about how probably the payout is to be maintained.
M&G, for instance, has a ten.5% yield and final month introduced the newest enhance in its annual dividend per share, but the M&G share value is down 10% over the previous yr.
Nonetheless, it’s up 74% over 5 years. Once more although, I feel which will merely replicate a pandemic-era baseline. Going barely additional again, to M&G’s itemizing in 2019, the efficiency up to now has been a 15% share value fall regardless of a constantly excessive dividend yield.
Within the case of Phoenix, I feel the mixture of a enterprise seeming fairly uninteresting (as insurance coverage can do) with being obscure has additionally constrained investor enthusiasm for the inventory.
Phoenix could possibly be a high-yield cut price
Nonetheless, whereas some shares don’t excite traders, cash tends to speak. If Phoenix has robust potential as a enterprise, why has its share value carried out weakly over time even whereas the agency continues at hand out beneficiant dividends?
There are dangers right here that would present some rationalization. Lengthy-term valuation assumptions in regards to the types of insurance policies housed on Phoenix’s books may be challenged by unexpected actions within the financial system, for instance. So a enterprise that appears worthwhile for a few years can all of a sudden begin making far much less cash than anticipated because the financial system shifts.
However whereas income are an accounting idea, money flows present the onerous, chilly money a enterprise is producing.
Final yr, Phoenix’s working capital era was £1.4bn. It achieved that degree two years forward of schedule. It now expects working capital era to develop by mid-to-high single-digits yearly, in proportion phrases.
If it might obtain that, the dividend seems to be comfortably safe to me. Phoenix’s progressive dividend technique foresees annual development within the dividend per share, though no dividend is ever assured.
For that degree of working capital era, the market capitalisation of £5.4bn seems to be low to me.
Over the medium-to-long time period, I might anticipate strong enterprise efficiency may justify a better share value for Phoenix. On prime of that, I reckon the excessive yield makes this a share traders ought to contemplate.
