Phoenix Group boosted by strengthening cash flows

The market responded positively to Phoenix Group’s (PHNX) numbers for 2023, with the performance of its pensions and savings and retirement solutions businesses to the fore. Adjusted operating profit before tax increased 13 per cent year on year to £617mn, while the contractual service margin was also heading in the right direction.

Volumes provide cause for encouragement. Phoenix saw a 72 per cent year-on-year increase in new business net fund flows, reaching £6.7bn, and primarily driven by strong workplace flows.

Results for the long-term savings and retirement specialist were aided by the part VII transfer of Standard Life and Phoenix Life, announced in November, while total cash generation of £2.02bn outstripped the previously upgraded target rate. The £1.51bn in incremental new business long-term cash generation meant the group surpassed its target rate two years ahead of schedule.

The group remains well insulated against wider instability in some of its underlying markets, with a Solvency II surplus of £3.9bn on the balance sheet, including a prudent £70mn consumer duty provision. Management aims to reduce debt by around £500mn by the end of 2026, with a goal of achieving a Solvency II leverage ratio of roughly 30 per cent. Cost savings of £250mn are targeted for the same year, along with £900mn in adjusted operating profit. It also aims to grow operating cash generation from £1.1bn in 2023 to £1.4bn in 2026, an ambitious 25 per cent increase.

Given the group’s rejigged business model, management now thinks it appropriate that a “progressive and sustainable” dividend policy is instituted, which is understandable given the positive beat on cash flows. The asking price is broadly in line with the sector, and the prospective dividend return has its attractions, but we will maintain our neutral stance ahead of progress reports on the 2026 targets. Hold.

Last IC view: Hold, 476p, 28 Sep 2023