The rise in Phoenix Group Holdings‘ (LSE:PHNX) share price over the past few months has exceeded my expectations. The recent earnings forecast from the FTSE 100 insurer struck a bullish tone too. I originally sought out the business for the income it could pay me, but I’ve been impressed by the growth in its share price ever since. Do I believe it can continue rising?
Let me provide the back story to my relationship with this stock.
Inflation-protecting payouts
Earlier in May, I highlighted how the Phoenix Group was a company offering the type of income return that could protect against inflation. The reason was that its dividend yield — at 8% — was one of the highest in the FTSE 100. The yield was also above the inflation rate (7.9% at the time of writing).
The best bit was that I believed the dividend could grow even further in the long run. Recent developments confirm this may be the case. Earlier this month, Phoenix CEO Andy Briggs announced a 2.5% dividend increase. In this regard, the stock is performing in line with my expectations.
A bull run looks under way
I also anticipated that capital growth was a possibility, but not a guarantee. Funnily enough, I now think the capital growth case is just as compelling as th- high yielding income payouts that Phoenix offers.
The stock has risen 10% since I last covered it. And here are three reasons why I believe there’s even more growth on the horizon.
First, the dividend increase I mentioned earlier was linked to a cash-funded acquisition of insurers Sun Life UK. This instantly increases Phoenix’s market share and future earning potential. It seems the chief executive agrees with me. His purchase of half a million pounds worth of shares in the past year demonstrates confidence in the company’s future.
Second, Phoenix has a higher annual earnings forecast than other insurers like Prudential and Legal & General. Despite this, the Phoenix Group share price is still undervalued relative to those peers.
Third, a consensus of city analysts suggests the fair value of the stock should be over £10 when future cash flows for the company are considered. That’s a great deal more than its current price of around £6.80. It’s a serious indication to me that there’s more mileage in this growth story.
Higher rates benefit the share price
The chance of the stock seeing long term growth looks even stronger once I take into account the current macroeconomic environment.
Underlying inflation pressures should remain elevated and central banks will most likely continue increasing interest rates.
As interest rates head upwards, an insurance company’s liabilities (in the form of life policies) decline. This makes them more profitable.
As such, I’m backing the Phoenix Group to continue be a strong performer during the current business cycle. And I am expecting this performance to continue to boost the share price.
I intend to purchase some shares ahead of the next dividend payment.