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One FTSE 100 dividend income stock is hot right now. The company in question is insurer Phoenix Group Holdings (LSE: PHNX) and I’m thrilled by its progress, because I’ve loaded up on the insurer over the last 15 months.
My reasons for originally buying the stock were pretty simplistic. I was dazzled by its sky-high yield.
When I first bought Phoenix in January and March 2024, it was yielding just over 10%. With a price-to-earnings (P/E) ratio of around seven, I wondered why everyone else wasn’t filling their boots. Was I missing something?
A quick look at the dividend record showed eight increases in the previous 10 years. Annual dividend growth could be modest, but given the high starting point, that didn’t worry me too much.
Solid total return
The Phoenix share price has now climbed 25% in the past year. Okay, that’s not red hot for a whizzy growth stock, but it’s pretty toasty for this sector.
Having averaged up in March this year, my own personal share price gain is 16%. But with dividends reinvested, that climbs to 33%. These are early days though.
There’s no guarantee the shares will continue at their current lick. Measured over five years, the Phoenix share price is up a modest 6.5%. Loyal investors will still have bagged plenty of dividends though.
Its 2024 results, published on 17 March, underlined the strength of the business. Operating cash generation jumped 22% to £1.4bn, two years earlier than planned. The board expects to generate excess cash of £1.1bn across 2024-26. So that dividend still looks secure to me.
Hidden challenges
Phoenix still faces hurdles. Interest-rate volatility can distort the value of its long-term annuity liabilities, so a sudden move lower could force recalculations that tighten the dividend outlook.
The group was built on running closed life insurance and pension funds, but must also find fresh sources of cash to sustain its payout. That’s no picnic in a mature and competitive market where any new opportunity draws rivals like flies. Further acquisitions seem likely, but integrating new businesses carries execution risk.
A rumoured rebrand to the Standard Life name may boost retail investor awareness, but such projects can distract management from core operations.
The yield has eased from last year’s highs to around 8.58%, yet that remains exceptionally generous. It may only rise by around 2% a year to keep the payout covered. That pace lags inflation right now, so it’s falling in real terms. If that continues, there’s a risk investors could drift away.
Another concern is that inflation could drive interest rates back up, improving returns on cash and bonds. That could hit demand for high-dividend stocks like this one.
Plenty to like
The 16 analysts serving up one-year share-price forecasts for Phoenix have produced a median target of 633p. That’s pretty much where the share stands today, so if they’re right, I can’t look forward to much growth this year.
I can look forward to that dividend though.
Investors considering buying Phoenix today will note that the P/E ratio is now stands at 13.8. Not as cheap as it was, but still decent value.
I think this is still worth considering for passive income seekers, but they should treat any share price growth as a bonus, rather than something that’s baked in.
