2023-10-15 05:46:43 ET
Summary
- Phoenix Group Holdings' stock has declined 23% YTD, despite having a high dividend yield of 10.9% as a challenging macroeconomy has impacted investor sentiment towards financials.
- The company's profits have also been impacted, though its focus financial metrics like cash generation and asset growth look alright.
- Even with a competitive P/B compared to peers, however, a future rise in the stock can't be guaranteed going by its losses.
UK based financial services company Phoenix Group Holdings (PNXGF) has a firmly established status as a big insurance and investments provider. It's even a part of the FTSE 100 ( UKX ) index, which includes the biggest 100 stocks by market capitalisation on the London Stock Exchange.
Neither its position nor its huge trailing twelve months [TTM] dividend yield of 10.8% has, however, stopped the downtrend in its stock price. Phoenix is down 23% year-to-date [YTD]. Moreover, it has declined even over the past five years, admittedly with stock gyrations over time. As a result, over this time, total returns on it are actually negative.
This makes Phoenix a tricky stock. While its dividend yield is really attractive, a healthy passive income at the cost of investors’ capital doesn’t sound like a good idea. This of course raises the question - can the share price see an uptick anytime soon, or at least stabilise?
Why did the stock fall?
First, let's talk about why the stock fell in the first place. To be fair, the FTSE 100 index hasn’t gone anywhere YTD either, with a rise of less than 2%. But this is still better than Phoenix’s performance during this time.
The stock's performance makes more sense when we consider the bigger picture for financial services. The company’s FTSE 100 peers Prudential PLC (PUK), Legal & General (LGGNF) and Aviva (AIVAF) have all declined YTD (see chart below).
Financials have weakened for two reasons. The first is the macroeconomy. The UK economy might have avoided a recession, but it's still in a slowdown. This has come on the back of a cost of living crisis. With expenses being cut back, insurance premiums are exactly the kind of discretionary expense that is likely to be avoided. Second, the banking crisis seen earlier this year has also spooked investors. This is evident also in the S&P 500 Financials index, which is down by 3.3% YTD.
However, there are balancing factors coming in as well. Rising interest rates are one, as premiums fall when rates rise. Phoenix itself has alluded to this in its results report for the first half of 2023 (H1 2023) in the context of recent growth in annuity purchases.
With rates expected to stay elevated over the next year, while inflation is declining, insurance policies can look more attractive again as discretionary spending can be expected to improve. Further, the UK economy is expected to stay steady in 2024 (see discussion on 'Prospects for the world economy' in the link), which would also ease demand conditions further.
About Phoenix Group Holdings
The company is poised to benefit from better macroeconomic trends going forward, going by its position in the market. It had significant assets under administration [AUA] of GBP 260 billion as of 2022, with the biggest contribution from the heritage segment, which doesn't actively sell policies anymore. Pension and savings, particularly in the workplace category, come in next, followed by retirement solutions.
The company is also focused on growing, with a marked preference for inorganic growth, a strategy it intends to continue. It has added well-known brands like Standard Life, which provides savings and retirement products, Sun Life, which offers financial products for those over 50 and reassure, a pension consolidator since 2020. These add to its homegrown brands that provide wealth management and corporate investment services (see chart below).
Focus financial metrics
The financial metrics that Phoenix focuses on look alright as well for H1 2023. The first of these is operating companies' cash generation, which is the amount remitted by these companies to the holding company. This is especially significant since it’s used to pay out dividends, besides covering various costs.
The company reported GBP 898 million for the number in H1 FY23. This is a 5% YoY decline, which isn't surprising considering the macroeconomic scenario. In fact, the company's full-year target of GBP 1.4-1.5 billion too is 10% below the number for 2022.
This is a tad disappointing, even as it's expected. However, it's still an encouraging figure considering that it’s 66.5% of the full-year target. This also continues to bode well for dividends, with forward dividend yield looking strong at 10.8%. However, to get the full dividend picture, we also need to look at the reported numbers discussed in the next section.
The next metric Phoenix highlights is the incremental new business long-term cash generation, which reflects the non-discounted future cash generation from businesses created during a time period. This number more than doubled from last year to GBP 885 million for H1 2023, a positive since that reflects the returns on surplus capital investments.
Finally, there is the change in assets under management, which have also risen over the past six months (see table above) on account of net positive inflows on all its growth segments, except retail inflows. Significantly, the acquisition of Sunlife of Canada, UK.
The key takeaway from the discussion on focus metrics is that Phoenix is growing its assets and its new business, and even has generated cash from operating companies that can continue healthy dividend payouts.
Reported results
The reported figures, however, aren't quite as robust. While it has reported a slight increase in the adjusted operating profit, it continues to remain loss-making on a net basis, continuing the trend from last year. This is essentially down to shrinking investment returns (see table below).
The company attributes this loss on investments to being over-hedged against both rising yields and global equity markets, as well as currency and inflation trends. If this had happened just once, it would have been more acceptable, but the same trend was seen in H1 2022 and the full year 2022 as well. To be fair, the extent of loss is much smaller due to "much lower market volatility" as Phoenix puts it. Still, the loss has been sustained.
The market multiples
I find the continued loss particularly worrisome from the stock price perspective. When considering its market valuations, the TTM price-to-earnings (P/E) ratio can't be considered with the background. Moreover, if the company continues to report losses, even if on a reported basis, at some point, the dividends would look less feasible too. This leaves us with a wait-and-watch on the earnings number.
Comparing the price-to-book (P/B), at 1.36x, shows that Phoenix isn’t badly placed compared to peers. Its P/B is higher only than those for Aviva, which indicates that a small upside might exist. But I’m not holding my breath.
What next?
Phoenix Group Holdings has a lot going for it, especially in terms of the growth in its business. Its dividend yield is also very attractive. However, it is loss-making. And the outlook for profits is unclear as well. In the meantime, its total returns have been negative over the past years, as sagging share prices prove to be a big drag. I’d Hold for better profit trends before considering an investment in this stock.
For further details see:
Phoenix Group Holdings: Waiting For Profits