In our 2020 Tips of the Year issue, we made the case for owning shares in Phoenix Group (PHNX), arguing that the life insurer’s acquisition of ReAssure, which completed in June, offered opportunities for earnings upgrades this year. Nine months and one global pandemic later, the case looks more solid and also more compelling in light of the many recent blue-chip dividend cuts. At its interim results, Phoenix raised its 2020 cash generation target range from £800m-£900m to £1.5bn-£1.6bn. Since then, consensus EPS forecasts have climbed 14 per cent, and are now a fifth higher than they were at the start of the year. Consensus estimates for 2021 and 2022 are up 10 and 26 per cent respectively over the same period. As such, Phoenix’s income case has strengthened, yet its share price is 8 per cent down, in the year to date, providing what we view as a fresh (and cheap) entry point for a well-managed dividend survivor.
Resilient, high-yield dividend
EPS upgrades
Integration track record
New business
Further expansion challenges
Sensitivity to markets
For the unfamiliar, Phoenix’s business model centres on acquiring closed life assurance funds from European insurers keen to unburden their balance sheets, and pension funds wanting to shift complex asset liability management to a third party. The industry driver, sparked by the introduction of the Solvency II directive in 2016, has resulted in four major transactions: the life insurance businesses of Abbey Life, AXA, Standard Life Aberdeen, and in its biggest purchase to date at £3.2bn, peer ReAssure from Swiss Re and MS&AD Insurance.
When the latter deal was struck last December, management expected to generate £2.7bn in cash from ReAssure’s in-force policies by the end of 2023, although no cash was expected for the current year. That, we are now told, was based on the group’s valuation of the business “as at September 2019”, meaning that all cash generation since that date, including the £290m from the Old Mutual wealth business ReAssure acquired in 2019, have now been booked. By the mid-point of 2020, ReAssure was deemed to have generated £690m of cash, in addition to the £433m generated by Phoenix’s legacy business in the period – itself a 51 per cent rise, year on year. While this could be seen as shifting the goalposts, it nonetheless provides the group with options to deploy its cash early.
Those include increasing dividend payments, which look well protected. For one, the fact that the Standard Life integration has already delivered £946m in synergies – a third above the original target and with more than two years to run – suggests cost savings from the latest deal could rise ahead of initial projections of £800m. Half a year into the union and ReAssure, we are reassured, has already met £227m of that target, at a cost of just £3m.
Added to that is resilient demand for new life insurance and bulk purchase annuities. Although most of Phoenix’s policies are in run-off, new business added £358m to long-term cash generation in the first six months of the year alone, thereby easily covering the interim dividend.
| Phoenix (PHNX) | |||||
| ORD PRICE: | 694p | MARKET VALUE: | £6.9bn | ||
| TOUCH: | 693-694p | 12-MONTH HIGH: | 806p | LOW: | 459p |
| FORWARD DIVIDEND YIELD: | 6.9% | FORWARD PE RATIO: | 7 | ||
| NET ASSET VALUE: | 752p | INSOLVENCY II RATIO: | 169% | ||
| Year to 31 Dec | Net income (£m) | Pre-tax profit (£m)* | Earnings per share (p)* | Dividend per share (p) |
| 2018 | 708 | 439 | 103 | 46.0 |
| 2019 | 810 | -14 | 89.8 | 46.8 |
| 2020* | 843 | 367 | 93.5 | 47.5 |
| 2021* | 895 | 430 | 99.3 | 48.2 |
| +6 | +17 | +6 | +1 | |
| Beta: | 1.4 | |||
| *RBC forecasts, adjusted PTP and EPS figures. | ||||
