ii view: is Phoenix Group stake sale a buying opportunity?

A 6.5% plus dividend yield and ownership of the SunLife over 50s brand. We assess prospects. 

Swiss Re halves its holding in Phoenix Group 

ii round-up:

Life and pensions industry consolidator Phoenix Group (LSE:PHNX) today confirmed that shareholder Swiss Re (SIX:SREN) had sold half of its investment in the company, taking its remaining holding in Phoenix down to 6.6%.

Reinsurer Swiss Re previously acquired the holding following the 2019 sale of its part-owned UK business ReAssure Group to Phoenix. 

Phoenix shares fell by more than 2% in UK trading following the stake sale to a series of institutional investors. Its shares have fallen by 10% since the end of 2019, just after the ReAssure acquisition and just prior to pandemic induced market lows. Shares for fellow life assurer Legal & General (LSE:LGEN) are down by a similar amount. Shares for Aviva (LSE:AV.) and Prudential (LSE:PRU) also marginally lower.

Swiss Re’s remaining stake in Phoenix is now subject to a 90-day period under which it cannot sell. Broker Morgan Stanley highlighted that the sale should increase the free float in Phoenix, improving liquidity in the stock.

The broker also pointed out Phoenix’s underperformance of the broader SXIP insurance index year-to-date, along with its strong track record in exceeding its financial targets. Earlier in the year, Phoenix upped its expected synergies including cost savings by 30% following the acquisition of ReAssure to just over £1 billion. 

Phoenix has around 14 million customers. It operates both closed or heritage and open businesses.  The heritage business comprises products that are no longer marketed to customers, and where Phoenix has stepped in as the custodian of the policies. It has, to date, consolidated of over 100 legacy insurance brands. 

Its open business brands being sold to customers today include SunLife, for which it sells a range of financial products specifically for the over 50s.

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. Once well-known brands such as Pearl Assurance and Abbey Life are now both part of Phoenix. 

Phoenix’s open business today includes workplace pensions and customer savings divisions. It also includes a retirement solutions business which encompasses both vesting annuities and its bulk purchase annuity business. The rising cost of providing staff pensions has also seen many companies closing and then offloading their obligations via bulk purchase annuities to outside entries such as Phoenix Group. 

For investors, the part sale may in the short-term mop up buying interest. It also raises a question mark over Swiss Re’s remaining stake. Further business buys at the right price are also never guaranteed and changes in regulation can impact. 

But Phoenix’s track record for growth via acquisitions is solid. Its previous buying of the Standard Life (LSE:SLA) brand name and use of its investment management services should help generate sales. An historic and forecast dividend yield of over 6.5% is also difficult to ignore in the current ultra-low interest rate environment. In all, with 2020 generating its highest ever year of open business growth, Phoenix will likely remain worthy of continued investor support. 

Positives: 

• Record cash generation in its last financial year
• Attractive dividend payment (not guaranteed)

Negatives:

• Regulatory changes can impact
• Could fail to make further value adding acquisitions

The average rating of stock market analysts:

Buy