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Dividend-paying stocks Phoenix Group (LSE:PHNX) is offering a monster return at the moment and as a result UK investors are snapping up shares. Last week, it was the most bought stock in Hargreaves Lansdown.
Should I follow the crowd and buy FTSE 100 stocks for my portfolio? Let's take a look.
Phoenix in a nutshell
Before we dive into the numbers, it's worth briefly reviewing what this company does because it's not a household name.
Phoenix Group is a savings and investment company with around 12 million customers. Its aim is to become the UK's leading savings and retirement income company.
Over the years, the long-standing company has grown steadily through a series of mergers and acquisitions. Its current brands include Standard Life, SunLife and Phoenix Wealth.
At the current share price of 553p, the company's market capitalisation is around £5.6bn, making it one of the smallest companies in the FTSE 100 index.
Favorable demographics
Looking at Phoenix Group today, in my opinion, there are many positive aspects to the business from an investment perspective.
For a start, there is a long-term growth story due to demographics. With the UK population ageing rapidly, demand for retirement income solutions should be quite high in the coming years.
Secondly, the company is generating a good amount of cash at the moment. In the first half of 2024, it generated £647m in operating cash flow, up from £543m the year before.
Third, the valuation seems reasonable. The current price-to-earnings (P/E) ratio is 12.3.
Finally, we have the massive dividend. For 2023, Phoenix Group paid out 52.65 pence per share to investors, which translates to a yield of 9.5% today.
Various risks
However, digging deeper, I have some reservations about the stock.
The first is that dividend cover (the ratio of earnings to dividends) is low. This year, analysts expect earnings per share of 45p and dividends per share of 54p, giving a ratio of 0.83. Generally speaking, a ratio below one is a warning that a payout is not sustainable.
Now, this may not be a problem, as the company is generating plenty of cash, as I mentioned earlier. This year, it expects to generate between £1.4bn and £1.5bn in cash. This should be enough to cover the dividend, which only cost the company £520m last year. Still, I consider the low dividend coverage ratio to be a red flag.
A second problem is that in the first half of 2024 the company recorded a significant loss (£646m). This might be a short-term thing, but it is not ideal. I like to invest in companies that are consistently profitable, as they are less risky.
Another factor to consider is that there is quite a bit of debt on the balance sheet (£3.7bn in loans at the end of the first half), which adds risk.
Finally, the stock does not have a good track record in terms of its trading price. Over the past 15 years, its price has not changed.
Should I buy it?
After weighing all this, I have decided that Phoenix Group shares are not for me.
There could be some big dividends here in the short term.
But given the debt buildup, low dividend coverage, and lack of long-term gains in share price, I believe there are better dividend stocks to buy for my portfolio.