ii view: Phoenix Group generating more cash than expected

Industry consolidator Phoenix is using the cash to bankroll a dividend yield of over 6%. 

Trading update

Chief executive Clive Bannister said:

"This trading update further reinforces Phoenix's conviction in its business model and its capacity to generate Cash, deliver Resilience and exploit multiple avenues of Growth to deliver long-term sustainable cash generation, not just today but in the years ahead. We continue to place customers at the heart of what we do and are committed to delivering a high level of customer service and to improving customer outcomes.”

ii round-up:

Life and pensions industry consolidator Phoenix Group (LSE:PHNX) reported reassuring trading in this update ahead of its December year-end. 

Cash generation of £707 million for the full year 2019 exceeded management’s prior target of £600 to £700 million and was up from the £664 million generated in 2018. Cash generation is a measure of cash and cash equivalents remitted by its subsidiaries to the holding company and is available to cover dividends, debt interest, debt repayments and other items.

Tracing its roots back to 1786, Phoenix has around 10 million policyholders and £245 billion of assets held by its various life companies, including the 2018 acquired Standard Life Assurance business and its ongoing strategic partnership with Standard Life Aberdeen (LSE:SLA).

It remains on track to deliver a £1.2 billion total synergy target for the Standard Life businesses transition, which management noted was progressing to plan.

The share price rose by more than 1% in early afternoon UK market trading. 

ii view:

Intense competition and pressure on life and pensions providers to reduce costs has allowed Phoenix to grow via acquisitions and then strip costs. Pearl Assurance and Abbey Life are now both part of Phoenix. 

The rising cost of providing staff pension schemes has also seen many companies closing and then offloading their obligations to outside entries such as Phoenix. A £1.1 billion buy-in from the PGL Pension Scheme provides a recent example.

For investors, a prospective dividend yield of over 6%, not guaranteed, offers appeal and, while Brexit and its potential impact on both its UK and Irish businesses generate some uncertainty, the shares have been chased to new highs.

Positives: 

• On track to deliver its synergy target for its Standard Life acquisition
• Attractive dividend payment

Negatives:

• Facing Brexit uncertainty
• Phoenix may fail to make further value adding acquisitions

The average rating of stock market analysts:

Buy