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Phoenix highlights M&A opportunities

Performance boosted by bulk purchase annuities
March 14, 2022
  • Change in dividend criteria
  • Opportunities within UK heritage market

Phoenix (PHNX) swung to a statutory loss in 2021 due to £1.13bn in negative investment returns, along with £639m in amortisation and impairment charges. Away from non-cash items, the insurance services provider increased revenue by 36 per cent, while cash generation hit a new annual record, albeit with the inclusion of £400mn of integration synergies.

Organic growth from the insurer’s open business more than offset the run-off of its heritage assets, so long-term cash generation from new business came in at £1.18bn, a 55 per cent increase on the prior year, with the lion’s share attributable to bulk purchase annuities (BPA). Related BPA premiums increased by a hefty 124 per cent.

The dividend policy has been altered to reflect the ongoing commitment to M&A, with a dual emphasis on organic and inorganic growth, leading to the inaugural organic dividend increase of 3 per cent. Chief executive Andy Briggs said that stakeholders “can be confident that [Phoenix’s] in-force business can pay our current, increased dividend over the very long term”. Briggs went on to say that the UK heritage market is worth c.£480bn with “a small number of large portfolios, as well as a larger number of small-to-mid size portfolios” that the insurer could target.

It seems likely that inorganic growth is set to determine immediate performance. And there should be scope for further M&A given the existing Solvency II Surplus. FactSet consensus indicates that assets under management will continue to tick up during the current year, while adjusted EPS will be broadly flat at 78.5p a share. Nevertheless, given the £11.8bn in long-term free cash available to shareholders, coverage levels, and improved prospects for distribution, we maintain our buy call. Buy.  

Last IC view: Buy, 685p, 11 Aug 2021

PHOENIX GROUP (PHNX)  
ORD PRICE:635pMARKET VALUE:£6.34bn
TOUCH:634-635p12-MONTH HIGH:764pLOW: 559p
DIVIDEND YIELD:7.7%PE RATIO:na
NET ASSET VALUE:582p*SOLVENCY II RATIO:180%
Year to 31 DecNet premiums (£bn)Pre-tax profit (£mn)Earnings per share (p)Dividend per share (p)
20170.94-0.01-6.9050.2
20182.060.2666.646.0
20193.480.358.7046.8
20203.911.2791.847.5
20215.38-0.43-86.448.9
% change+37--+3
Ex-div:31 Mar   
Payment:9 May   
*Includes intangible assets of £4.6bn, or 557p a share