-Phoenix Group offers 8% dividend yield
-Recent share price performance has disappointed
-2021 cash generation levels will be difficult to sustain, and contingent on new deals
Insurance company Phoenix Group (PHNX) offers investors a dividend yield of just more than 8% based on consensus forecasts.
Full-year results (14 March) were impressive.
Phoenix delivered £1.7 billion of cash generation in 2021, which was 7% ahead of market expectations.
This was also above the group’s targeted range of £1.5 billion-to-£1.6 billion.
However the share price has failed to respond, drifting 2.9% over the last month and falling 9.8% over the last six months.
MARKET CONCERNS
Growth in the dividend is contingent on the group successfully offsetting the decline in organic cash generation by further mergers and acquisitions.
Phoenix Group has an expertise in buying ‘heritage’ assets from other insurance groups, and improving their efficiency by migrating them to its own platform.
These consist of insurance policies that are no longer sold, but are still on the books as premium paying policies.
If management fail to acquire further back books then there will be pressure on cash flows and dividends.
It has been over 18 months since the group secured its last deal.
An additional difficulty is the necessity for Phoenix to reduce the costs every year on the closed end business.
This is becoming increasingly challenging given the rising costs of information technology coupled with increased regulatory scrutiny.
UNFAVOURABLE BUSINESS MIX
Phoenix has a sub-optimal balance between its lumpier wholesale bulk purchase annuities business (BPA), which accounts for £950 million of the £1.18 billion of cash released from new business written in 2021, and its retail life insurance segment.
The wholesale business is very capital intensive in sharp contrast to the retail life insurance operations which are capital light.
This is reflected in net future cash releases whereby two thirds come from wholesale and one third from retail.
IS CASH GENERATION SUSTAINABLE?
Only half of the $1.7 billion of cash generation generated in 2021 was organic. £800 million emanated from the natural unwinding of the back book.
However the balance was driven by management actions (£400 million) integration synergies (£400 million), and a release of life surplus (£100 million).
Given the significant proportion of 2021 cash that is supported by management actions, this level of cash release may be hard to sustain in 2022.
