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Phoenix is an important income share in an inflationary environment

The damage from the LDI debacle weighed heavily on the share price but the recovery continues
March 13, 2023
  • Interest income improves substantially
  • Valuation looks attractive for income 

Phoenix Group (PHNX) endured a difficult autumn as traders took aim at any company with even a tangential connection to servicing or originating swaps for the liability-driven investment (LDI) industry. With that bad memory now fading, these results were a chance to move on and showcase the dividend attraction that forms a major part of the company’s investment case. Phoenix delivered a modest rise in the payout against a background of complex market movements, making the income statement difficult to interpret – a life insurer’s primary concern is to hedge its solvency II base, rather than protect the reported income statement from wild asset swings. Therefore, the figures require a certain amount of interpretation.

The IFRS adjusted operating profit looked more coherent at £1.25bn, which was basically flat on 2021. At these levels, even small changes in interest rates can have a broadly positive impact, and rising rates made themselves felt with interest income generated by the company’s asset base nearly £250mn higher at £2.88bn. This included a notable third-party contribution from related entities – interest income here rose from £1mn to £21mn for the year on the back of better rates.

In terms of the outlook, management seemed coy about forecasting specifics other than that the economic outlook might be difficult. However, with interest rates underpinning the viability of defined-benefit schemes, and about £470bn of heritage business to complete, Phoenix should have a decent pipeline of de-risking business this year as pension funds offload liabilities.

There is barely a sliver of paper between valuations for the big life insurers, which is reflected in Phoenix’s forward price/earnings (PE) ratio of 10.6 for 2023 and its 8.5 per cent dividend yield. An important income share given the high inflation background. Buy.

Last IC view: Buy, 676p, 15 Aug 2022

PHOENIX (PHNX)   
ORD PRICE:600pMARKET VALUE:£ 6bn
TOUCH:600-601p12-MONTH HIGH:690pLOW:501p
DIVIDEND YIELD:8.5%PE RATIO:NA
NET ASSET VALUE:519pSOLVENCY II:189%
Year to 31 DecNet premiums (£bn)Pre-tax profit (£bn)Earnings per share (p)Dividend per share (p)
20182.160.2666.646.0
20193.480.358.7046.8
20203.911.2791.847.5
20215.37-0.43-86.449.9
20225.36-2.84-18550.8
% change-0.2+560+114+2
Ex-div:30 Mar   
Payment:10 May