Dividend Stocks Gaining Investors’ Attention

Dividend pay-out stocks are a vital part of investor’s portfolio, especially when bond yields are nearly at historic lows. Moreover, it has been observed that non-dividend-paying stocks have underperformed against regular dividend paying stocks historically. Therefore, investing in dividend-paying stocks safeguards the portfolio against the market risks and volatility. Such companies are usually matured companies with sustainable cash flows to fulfil dividend payment obligations. However, the Company should have a track record of offering regular dividends and constantly paying off its debt obligations.

Dividend Pay-Out Trends and Sustainability

• The dividend concentration among FTSE 100 Companies is quite high as nearly 20 firms contributes 74% of the total FTSE 100 pay-out in 2020.
• Moreover, the estimated dividend for 2020 has fallen to GBP 62 billion from GBP 91 billion (forecasted at the beginning of the year). The second wave of pandemic poses a risk to cash flows and profitability, and thus, the dividend payments.
• For FTSE 100 Companies, it is estimated to have a 35% slump in 2020 profits, which is deepest since 2015. Therefore, the dividend payments can be depressive in FY20.
• The RHS chart depicts the four scenarios for 2020-21 considering the Covid-19 impact, and other market uncertainties.

(Source: Company accounts, Sharecast, analysts’ consensus dividend forecasts)

However, there are some stocks which have overperformed the premium benchmark index, in terms of value and consistency of dividends. Considering the above factors, we will review an insurance provider, which is not merely offering a lucrative dividend yield but also has the potential of offering consistent and sustainable business growth rate trajectory. 

Phoenix Group Holdings PLC (LON: PHNX) – Strong business model with sustainable dividend growth rate trajectory

Phoenix Group Holdings PLC is a FTSE 100 listed Company, which is the largest life and pensions consolidator in Europe. It specialises in the management and acquisition of Heritage life insurance and pension funds. It operates through three main segments, namely UK Heritage, UK Open, Europe, and Management Services.

The UK Heritage business comprises of products which are built through the consolidation of over 100 legacy insurance brands and they are no longer actively marketed. Adjacently, the Open business underwrites long-term savings and retirement products, and these products are actively marketed to existing and new customers.

The Company also has a brand called SunLife, which sells a wide range of financial products, particularly for the 50s market. PHNX has been serving in the insurance world since 1782, and presently, it operates as Europe's largest specialist consolidator of heritage life assurance funds. It has nearly 14 million policies and around £248 billion of assets under administration.

(Source: Presentation, Company Website)

Track Record of Dividend 

In H1 FY20, PHNX has maintained a stable and sustainable dividend policy despite an unprecedented global crisis with an interim dividend per share of 23.4 pence. It clearly indicates that the Company has progressive and sustainable dividend policy, which has yielded dividend nearly twice that of the FTSE-100 benchmark. The projected 3% uplift of the final dividend of FY20 would be the fifth increase in nine years.

On 4 September 2020, the Company paid its last interim dividend while the record date was 14 August 2020. The upcoming ex-dividend date is scheduled on around 1 April 2021 while the payment date is expected to be 18 May 2021. 

The table below depicts the historical track record of consistent dividend policy since 2007.

 (Source: Presentation, Company Website)

The picture below depicts that the dividend payment is supported by the resilient balance sheet.

(Source: Presentation, Company Website)

Key Fundamental Statistics

Industry Outlook Dynamics

As per the publication from the Research and Markets, the global insurance market is projected to reach US$6,840.7 billion in 2023, representing a CAGR of 6% from 2020. It is noteworthy that the market declined to US$5,807.3 billion in 2020 from US$5,939.5 billion in 2019. The key factors that would drive or influence the insurance industry - continuing low-interest-rate environment, tighter regulatory regimes, increasing digital solutions for financial management, and challenging equity market.

Growth Prospects and Risk Assessment

The Company manages its capital in such a way that it ensures sufficient distributable profits to pay dividends in accordance with the dividend policy. The Board also proposed to increase the final dividend of FY20 by 3%. It should be supported by the robust cash generation and the acquisition of ReAssure Group. The acquisition of ReAssure Group is expected to generate £120 million of capital synergies and £11 million per annum cost synergies. PHNX has established itself as the largest long-term savings and retirement business in the UK and aims to deliver long-term value to shareholders. The Company’s dependable long-term cash generation supports a stable and sustainable dividend policy. In H1 FY20, Shareholder Capital Coverage Ratio increased to 169% from 161% (level seen at the end of FY19).

(Source: Annual Report, Company Website)

However, there are certain principal and emerging risk and uncertainties, which can affect the business growth. The principal risks are pertinent to failure of partnership and acquisitions to drive the desired value, regulatory or legislative changes that can impact the cost and profitability. On the other hand, emerging risk includes adverse macroeconomic conditions that can impact customer sentiment and cash flows, risk of credit defaults with reduced creditworthiness after the economic downturn, changing solvency regime because of EIOPA review, and changing customer expectations.

Key Regulatory Updates

• 22 July 2020: PHNX completed the acquisition of ReAssure Group PLC from the Swiss Re Group. The transaction would bolster the Company’s key attributes of cash, resilience, and growth.
• 2 June 2020: The Company issued and published the terms of U.S.$500 million Fixed Rate Reset Tier 2 Notes due 2031 and £3 billion-Euro Medium Term Note Programme. The net proceeds of the Notes shall provide additional flexibility for the refinancing of existing Phoenix Group borrowings.

Segment Analysis

PHNX has four reportable segments, namely UK Heritage, UK Open, Europe and Management Services.

 (Source: Presentation, Company Website)

Key Shareholders Statistics

Financial & Operational Highlights – H1 FY2020 (30 June 2020)

• In the first half of the financial year 2020, the Company delivered strong results and is looking for higher cash generation in FY2020 after the acquisition of ReAssure.
• The Company has a higher £4.0 billion of Solvency II surplus along with 169% of Capital Coverage Ratio and a Leverage ratio of 27% as on 30 June 2020.
• PHNX has a high-quality debt portfolio of £21.6 billion with 16% with BBB rating and 0.1% bonds downgraded to sub-investment grade. The Company had no defaults in H1 FY2020.
• The Company maintained a sustainable and stable dividend policy, with an interim dividend of 23.4 pence.
• The new business delivered cash generation of £358 million in H1 FY2020, with operating profit of £361 million and Assets under administration (AUA) of £248 billion in H1 FY2020.
• With the successful acquisition of ReAssure Group, the Company become the largest long-term savings and retirement business in the UK with AUA of £324 billion and around 14 million policies.
• PHNX remained committed to delivering strong customer service and maintained a customer satisfaction metrics of above 90% target.
• The Company remained focused on the safety of employees and has enabled remote access for 99% workforce within 10 days of lockdown with the introduction of paid emergency leave.
• The Company continued to deliver on strategic priorities with increased customer satisfaction, investment in customer proposition and appointment of a new executive committee to lead the industry.

Financial Ratios

In the first half of the financial year 2020, the Insurance Metrics of Phoenix Group Holdings Plc remained strong as compared to the industry median. The Group’s reserves and investment ratio stood higher as compared to the industry. On leverage front, the debt-equity ratio of the Phoenix Group Holdings Plc’s was 0.66x, which was higher as compared to the industry median of 0.36x, reflecting that the company is more leveraged as compared to the industry. The asset-equity ratio was at 43.52x, which was higher as compared to the industry median of 10.34x. 

Share Price Performance Analysis

Daily Chart as on 11 September 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On 11 September 2020 (before the market close, at 8:46 AM GMT+1), Phoenix Group Holdings Plc shares were trading at GBX 691.20, down by 0.60% against the previous day closing price. Stock 52-week High was GBX 806.00 and Low of GBX 459.05, respectively.

From the technical standpoint, shares were trading well above the short-term support level of 50-day (GBX 680), 100-day (GBX 649.5), and 200-day (GBX 673.5) simple moving average prices, which reflects an uptrend in the stock.

Phoenix Group Holdings Plc Vs FTSE-100 Index (1 Year)

(Source: Refinitiv, Thomson Reuters)

In the last one year, Phoenix Group Holdings Plc share price has delivered 2.15 per cent return as compared to negative 17.91 per cent return of FTSE-100 index, which shows that the stock has outperformed the index during the last six months.

Valuation Methodology: Price/Book Value Approach (NTM) (Illustrative)

Business Outlook

The Phoenix Group Holdings has demonstrated resilience and growth in H1 FY20, underpinned by the stable dividend payment despite an unprecedented global crisis. The credit rating agency, Fitch has maintained A rating (Long-Term Issuer Default) with a stable outlook on the Company. The Company targets to generate cash of £5.9 billion in the medium-term period between FY20 to FY24.

Although there are uncertainties since the Covid-19 pandemic continues to unfold, the Company is well-positioned to deliver cash, resilience, and growth. Moreover, the strong new business and 41% year-on-year increase in Bulk Purchase Annuities holds the potential for the sustainability of dividends.

Certainly, dividend matters as it does not only provide income for pensioners but also underpin the share price valuation. For dividends, it is also important to look beyond the next 12 months since 2020 has been an unprecedented and unusual year. Despite Covid-19 uncertainties, the Company sustained a consistent dividend policy. With strong cash flow delivery, it shall be able to manage the debt repayments and deliver strong shareholder dividends. 

(Source: Presentation, Company Website)

Over the course of 4 years (FY15 - FY19), the Company’s revenue surged from GBP 692.00 million in FY15 to GBP 29,164.00 million in FY19. Compounded annual growth rate (CAGR) stood at 154.79 per cent.

Based on the decent growth prospects and support from the valuation as done using the above method, we have given a “Buy” recommendation for Phoenix Group Holdings Plc at the current market price of GBX 691.20 (as on 11 September 2020, before the market close at 8:46 AM GMT+1), with lower-double digit upside potential based on 1.23x Price/NTM Book Value (approx.) on FY20E book value per share (approx.).

*Dividend Yield may vary as per the stock price movement.

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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