Why hasn’t its 9.9% yield boosted the Phoenix share price?

Relating to dividends, insurer Phoenix Group (LSE: PHNX) is among the large beasts within the FTSE 100. Its mammoth 9.9% dividend makes it among the many most profitable FTSE 100 dividend shares. Relating to share value motion, although, Phoenix is extra underwhelming.

Over the previous 5 years, for instance, it has moved up simply 3% — but throughout that interval, the FTSE 100 index has soared 55%.

5 years in the past the market was nonetheless in the midst of pandemic turmoil and that could be an element within the hole. However even over a one-year timeframe, the Phoenix share value has underperformed relative to the index. Phoenix has fallen 1% up to now 12 months, whereas the FTSE 100 has moved up 5%.

What’s going on – and may it nonetheless make sense for an investor to think about Phoenix regardless of its underwhelming share value efficiency?

A excessive dividend might be engaging, but in addition scary

Maybe counterintuitively, I feel a part of the problem for Phoenix might really be its dividend.

Which will sound odd, however when an organization has a excessive yield, it may well typically make traders fearful about how doubtless the payout is to be maintained.

M&G, for instance, has a ten.5% yield and final month introduced the most recent enhance in its annual dividend per share, but the M&G share value is down 10% over the previous yr.

Nonetheless, it’s up 74% over 5 years. Once more although, I feel which will merely mirror a pandemic-era baseline. Going barely additional again, to M&G’s itemizing in 2019, the efficiency up to now has been a 15% share value fall regardless of a constantly excessive dividend yield.

Within the case of Phoenix, I feel the mix of a enterprise seeming relatively uninteresting (as insurance coverage can do) with being obscure has additionally constrained investor enthusiasm for the inventory.

Phoenix might be a high-yield discount

Nonetheless, whereas some shares don’t excite traders, cash tends to speak. If Phoenix has robust potential as a enterprise, why has its share value carried out weakly over time even whereas the agency continues handy out beneficiant dividends?

There are dangers right here that would present some clarification. Lengthy-term valuation assumptions concerning the kinds of insurance policies housed on Phoenix’s books might be challenged by unexpected actions within the economic system, for instance. So a enterprise that appears worthwhile for a few years can out of the blue begin making far much less cash than anticipated because the economic system shifts.

However whereas earnings are an accounting idea, money flows present the exhausting, chilly money a enterprise is producing.

Final yr, Phoenix’s working capital technology was £1.4bn. It achieved that stage two years forward of schedule. It now expects working capital technology to develop by mid-to-high single-digits yearly, in proportion phrases.

If it may well obtain that, the dividend seems comfortably safe to me. Phoenix’s progressive dividend technique foresees annual development within the dividend per share, though no dividend is ever assured.

For that stage of working capital technology, the market capitalisation of £5.4bn seems low to me.

Over the medium-to-long time period, I might anticipate stable enterprise efficiency might justify a better share value for Phoenix. On high of that, I reckon the excessive yield makes this a share traders ought to think about.