Some companies place more emphasis than others on providing their shareholders with dividends. If you’re in the market for blue-chip stocks with payouts at the higher end of the income spectrum, there’s a new entrant to the FTSE 100Â that I think fits the bill nicely.
Phoenix Group (LSE: PHNX) is a life insurance specialist with a distinctive business model that’s well-purposed for paying a stable and sustainable dividend. The expected promotion of the company to the FTSE 100 was confirmed officially last Wednesday, and it will formally enter the leading index a week on Monday.
Impressive results
Phoenix’s shares have climbed strongly since the start of the year, and are up a further 3% today, as I’m writing. Today’s rise follows the release of impressive annual results this morning.
Chief executive Clive Bannister commented: “These results show the strength of our group and have enabled us to again increase our short- and long-term cash generation targets.” The board said it was lifting the final dividend by 3.5% to 23.4p a share, “resulting in a new annualised dividend per share level of 46.8p going forward.”
At a share price of 720p, the prospective yield is a mighty 6.5%.
High visibility of long-term cash flows
The context for understanding the attraction of Phoenix’s distinctive business for income-seeking investors is the break-up of the traditional life insurance model. Economic and regulatory pressures have led certain players to refocus their businesses on asset management, and others to concentrate on specific areas of new business, while divesting legacy portfolios.
Phoenix has become Europe’s largest consolidator of life and pensions legacy assets. These businesses no longer actively sell new life or pension policies, but run-off gradually over time. As such, Phoenix has high visibility of long-term cash flows.
Of course, this is good news for projecting future dividends. As is management’s criterion for acquiring new assets, in that “any acquisition needs to at least sustain the current level of dividend per share.”
Successful acquisitions
In 2016, Phoenix acquired AXA Wealth’s pensions and protection businesses for £375m and Abbey Life from Deutsche Bank for £935m. The successful integration of these businesses — ahead of plan and targets — was followed last year by a transformational £2.9bn acquisition of Standard Life Assurance from Standard Life Aberdeen.
This is already looking like another big success. In today’s results, Phoenix upped its total synergy target from the acquisition by a whopping 70% — from £720m to £1.22bn.
Solid income buy
Phoenix will continue to be a consolidator of closed life funds, and has also entered the bulk purchase annuity market, which is a complementary source of annuity back books.
However, in addition to increasing the scale of its Closed business (or ‘Heritage’ business, as it calls it), the acquisition of Standard Life Assurance also brought Phoenix a significant Open business in the form of Standard Life branded insurance products. It’s committed to growing the Open business, supported by a strategic partnership with Standard Life Aberdeen.
With billions of pounds of long-term Heritage cash flows already in the bag, the drivers of consolidation in the industry increasing, and the Open business opportunity adding a further string to its bow, I’m convinced Phoenix rates highly as a solid income buy.