|Doesn't that cheese look good?|
Risk and reward are inseparable - however, I try to remember to find out what it is about the company the market does not like, so I can make my own assessment. So I take my time - a bit like a mouse sniffing around a mousetrap...
FTSE250 Phoenix Group Holdings provides life insurance and asset management services, as well as pension fund management. However, it does not write policies for new customers, it operates as a 'closed life fund' that only writes increments to existing policies. To that extent, its commercial future depends its skill in matching its liabilities with its investment income - and minimising the costs of doing so.
In fact it claims to be the 'largest UK consolidator of closed life assurance funds'.
The group reports £67.1bn of assets under management and more thab six million policy holders. The business has two core segments: life assurance (Phoenix Life) and asset management (Ignis Asset Management), which together employ around 1,200 people across the UK and Channel Islands.
The origins of the company are fascinating - take a look at the Phoenix Company Timeline: I spotted several companies that I have owned shares in, had a bank account with and even a small pension! The names include: Pearl Assurance, London Life, AMP, Britannic, Royal, Sun Alliance etc. Phoenix is also appears to be closely related, historically, to another closed life company Resolution, which I also own.
PHNX offers a dividend yield of over 6% with a massive dividend cover of over 4. A 2013 interim dividend of 26.7p per share was recently declared, representing an increase of 27% compared to the 2012 interim dividend. For an income investor that is like finding the Holy Grail!
The 2013 Half-Year Interim Results look impressive, painting a picture of a company that has dramatically changed its financial structure: 'transformational' is how they call it. Firm and forward-looking corporate actions are always a positive factor on share price. However, wading through the detail of the results did not help me understand why the yield is so high.
So. left to my own devices, I guess that the most obvious explanation is related to the potential future unwinding of QE - life companies hold a lot of fixed-interest securities, including gilts: these have been pumped up in value and will almost certainly fall in the medium term, as interest rates rise.
What has sparked particular interest in the company recently (and a rise in share price) is a potential tie-up with Swiss Re - what are described as 'preliminary discussions' in relation to a possible combination of Phoenix and Swiss Re's Admin Re business units, resulting in Swiss Re taking a minority shareholding in Phoenix.
So, in this case, I have to accept that the City does not seem to like PHNX: however, the potential future income stream looks good to me - so I have bought some.
[Purchase price: £7.46]
I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.