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The dividend forecast for Phoenix Group (LSE: PHNX) shares is unbelievably excessive in the intervening time. Presently, analysts anticipate a payout of 53.9p per share this yr and 55.5p subsequent yr. So, at immediately’s share worth of 505p, we’re taking a look at yields of a whopping 10.7% and 11%.
Can these forecasts be trusted? Are shares within the UK insurance coverage and financial savings firm dangerous? Right here are some things buyers must find out about Phoenix Group and its huge dividend.
Low dividend protection
There are actually some purple flags in relation to Phoenix’s dividend payout.
Presently, dividend protection (the ratio of earnings to dividends) right here is in damaging territory, which means that earnings received’t cowl dividends within the close to time period.
For 2024, earnings per share are forecast to come back in at 46.5p. So, we’re taking a look at a ratio of 0.86.
This doesn’t essentially imply that the dividend payout is unsustainable. However it’s not perfect. Typically talking, a ratio underneath 1.5 is a warning {that a} dividend payout is probably not secure.
One other purple flag is the yield itself. When an organization has a very excessive yield like Phoenix Group does, it’s typically a sign that the market doesn’t imagine it’s sustainable (the ‘smart money’ has dumped the inventory pushing the yield up quickly).
So, there’s some uncertainty in relation to future payouts right here, for my part.
Loads of money movement
The excellent news is that Phoenix Group is producing loads of money movement immediately. And money movement is an important ingredient in dividends.
Within the first half of 2024, the group generated whole money of £950m. And it lately suggested that it’s on observe to generate money of £1.4bn-£1.5bn for the complete yr.
Final yr, dividend funds solely price the corporate a complete of £520m. So in idea, there ought to be sufficient money to deal with the present dividend forecast.
Is that this a dangerous inventory?
As for the general danger degree of the shares, that’s onerous to evaluate.
The shares do look fairly low-cost immediately. Presently, the price-to-earnings (P/E) ratio is simply 10.8.
However right here’s the factor – the shares have appeared low-cost for years and nonetheless gone backwards. During the last three years, the inventory has misplaced about 25% of its total worth (offsetting positive aspects from dividends).
Share worth efficiency over the long run has been fairly poor too. During the last 10 years, the share worth has declined.
The corporate does have a three-year plan to spice up efficiency. And administration is assured that it’s constructing a rising enterprise that’s on observe to create shareholder worth.
Nevertheless, there’s fairly a little bit of debt on the stability sheet (£3.7bn in borrowings on the finish of H1). This provides danger.
One other danger is that the Monetary Conduct Authority (FCA) lately launched a market examine into gross sales of ‘pure protection insurance’ merchandise following concern that the design of some fee constructions may result in poor outcomes for policyholders. On account of this, Phoenix stopped the sale of its SunLife enterprise, stating that the uncertainty round commissions was a priority for potential purchasers.
Placing this all collectively, it’s clear that buyers must weigh danger and reward right here. Whereas the yield is excessive immediately, I really feel there’s no assure that total returns from the shares might be robust within the years forward.
