One UK share has baffled me for some time. Which is a worry, since I own it. On the face of it, this top FTSE 100 dividend income stock looks like a brilliant long-term buy-and-hold, yet its shares have failed to fulfill their apparently huge potential
The stock in question is insurer and closed-book pension provider Phoenix Group Holdings (LSE: PHNX). Right now, it has a trailing yield of a quite stunning 10.49%. On the FTSE 100, only Vodafone Group pays more (and its payout is about to be slashed in half).
The Phoenix dividend always looked a little bit too good to be true but I decided it really was affordable, and the board seemed confident too. I wouldn’t have bought the shares otherwise.
This stock is falling fast
Phoenix shares were dirt cheap when I bought them and remain so today, trading at 6.19 times earnings. I bought hoping they would recover but instead they keep sliding. They’re down 27.95% over five years, and 10.34% over the last year.
It’s down 4.5% in early trading this morning, making this the biggest faller on the FTSE 100. This follows a worrying report in yesterday’s Sunday Times that Phoenix is setting aside £70m to cut fees as it battles to meet the Financial Conduct Authority’s new consumer duty requirements. That’s on top of the £68m it has already spent removing exit fees.
The new consumer duty regime came into force for most of the financial services industry last July, and caused havoc at FTSE 100-listed advisory firm St James’s Place, which was forced to scrap exit penalties and slash customer charges to comply.
It will apply to closed-book products from 31 July this year, and it’s a big deal for Phoenix, which has around £119bn of its total £269bn of assets in closed-book products.
It could be a FTSE 100 flop
We’ll learn more when full year results are published on Friday 22 March, but the report has added a huge new layer of uncertainty for investors like me.
The stakes are high too. The St James’s Place share price has been hammered, crashing 65% over the past 12 months. If Phoenix suffers anything like that, the high yield will not compensate. Plus the dividend may be on the line. St James’s Place slashed its dividend in half and cut share buybacks too.
I won’t be selling my stake in Phoenix. I am bracing myself for a bumpy ride though, and trying to learn lessons. Obviously, investors cannot foresee every piece of bad news, but I hadn’t read about the consumer duty issue until today. Yet I sensed something was up. The stock really should have been doing better.
Should I take this opportunity to buy more? That would be a punt, given that I don’t know what we can expect on Friday. I’ll hold what I’ve got and take any punishment on the chin. Next time I see something that looks too good to be true, I’ll dig a lot deeper.
