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Final Friday (3 Might), the Phoenix Group (LSE: PHNX) share worth shot up from £4.90 to £5.26, representing a 7.35% rise. The sudden motion follows a sample of volatility that the share worth has exhibited all through this 12 months. In late March, it made a sudden leap from £4.76 to £5.55 earlier than falling again down simply as rapidly a number of days later.
So what prompted this newest enhance and can it proceed?
Threat discount
Phoenix Group isn’t precisely a family title, regardless of a £5.18bn market cap and 167 years in enterprise. More than likely that’s as a result of few individuals understand it’s the mum or dad firm of well-known manufacturers Customary Life and SunLife. These are each main insurance coverage companies that serve a good chunk of the native and worldwide market.
Nonetheless, the agency is best identified in investing circles, largely on account of its excessive dividend yield.
One potential purpose for the share worth enhance final Friday was the announcement of early redemption on all the corporate’s £250m mounted price tier 2 subordinated notes, due in 2029. In fundamental phrases, this implies it’s paying again these riskier (tier 2) varieties of loans earlier than they mature (or the rate of interest will increase). This might partially cut back sure dangers related to investing within the inventory.
So is now time to purchase? I’m not so positive.
The place’s the cash coming from
With a ten.3% yield, Phoenix Group appears to be like like a no brainer addition to a dividend portfolio – at first look. However there are some considerations. The group lately elevated its interim dividend to 26p, making its full-year dividend-per-share 53.3p. My concern is the way it will proceed to pay this dividend, particularly contemplating it has adverse earnings.
I can’t fault its observe report. It’s been making constant and dependable dividend funds for the previous 10 years. However that doesn’t assure it can proceed. Not solely does it have restricted money circulation, its debt of £6.18bn far outweighs its fairness of £3.54bn, leaving it with a debt-to-equity ratio of 174%. Property and liabilities are on par and curiosity protection is minimal at 2.3 occasions, so the place’s the dividend cash coming from?
My verdict
Whereas the corporate’s share worth is down 10% prior to now 12 months, there’s consensus amongst analysts that issues are enhancing. Earnings grew by way of 2023, bringing earnings per share (EPS) up from a adverse £2.74 to a lack of simply £0.13. Analysts now forecast the inventory to develop into worthwhile in 2025, with future return on fairness (ROE) anticipated to be round 25% in three years.
This clarifies two issues: sure, the share worth might begin enhancing this 12 months however this rally might be not the place it begins.
Personally, I’d like to rake within the returns of a ten% dividend yield, as I’m positive any investor would. However I can’t ignore the dangers current in Phoenix’s stability sheet and earnings assertion. Regardless of the stable observe report, I simply don’t see sufficient proof to counsel dividend funds will proceed uninterrupted. And if the share worth continues to say no, it might negate the dividend returns anyway.
As a risk-averse investor, I’d want extra concrete proof of stability and development earlier than I put money into the inventory.