Every investor loves a good juicy yield but before you slake your thirst, take a good look at what else you are being asked to wash down with it.
From the ashes
FTSE 250-listedPhoenix Group (LSE: PHNX) is a niche operator in the financial services industry, as the UKs largest consolidator of closed life funds. That means it specialises in acquiring and managing closed life and pension funds and its a big business, with6.1m policyholders and 76bn of assets. Recent acquisitions include big names such asAbbey Life, AXA Wealth and distribution business SunLife.
Phoenixmakes its money fromdecommissioning closed life funds, includingwith-profits funds, which may sound like a dying business but closed funds will be an issue for decades to come, and policyholders need Phoenix to securetheir interests, and their money.
Investors in Phoenix, which has a market cap of 2.95bn, have done well over five years, doubling their money. However, the last 12 months have been patchy, with the share pricegoing nowhere. Yetatthe same time the yield has surged to 6.22%. One reason is that Phoenix throws off growing sumsof cash, generating 486m in 2016, double its2015 total of 225m.
That allowed management to funda 5% dividend hike for2016, asits373m acquisition of AXA Wealths pensions and protection business and933m purchase of the Abbey Life business have generated synergies and boosted cashflow. The companys strengthenedSolvency II surplus, shareholder capital coverage ratio and rise in group operating profit from 324m t0351m in 2016 also impress.
Management has upgraded itslong-term targets for cash generation from 2bn to 2.8bn for 2016-2020, which should improve itsnon-existent dividend cover, currently -0.7%. However, growth prospects look patchy with earnings per share (EPS) expected to be flat in 2017, then to fall 2% next year. A forecast valuation of 16.9 times earnings hardly excites, given these challenges. Phoenix will rise again, butyou may have to bepatient.
FTSE 250-listedRedefine International (LSE: RDI) boasts aneven bigger yield at 8.44%, a level at which alarm bells start ringing. Redefine is an income-focused real estate investment trust, or REIT, which aims to deliver market-leading dividends throughout the property cycle.
Redefine has also been on the acquisition trail, buying the Aegon UK portfolio for 490m, lifting itsdiversified property portfolio to 1.5bn in total. It isfocused on what it calls Europes two strongest economies, the UK and Germany, which gives it some Brexit diversification.
Itsshare price is downmore than 15% to around 38p over 12 months, while over five years the share price is up only 18%. Redefine has been hit by an uncertain property market backdrop, which saw EPS drop 43% in the year to 31 August 2016. EPS growth is negligible for the next couple of years, as both revenues and profits looks set toflatten out.Last month itposted a portfolio valuation of 1.46bn, down from 1.52bn, with its loan-to-value ratio falling from 52.5% to 49.4%.
Some will be tempted byits valuation of 13.9 times earnings, and a solid price-to-book (P/B) ratio of 1. Income seekers should note thatdividend cover isjust 0.8. Redefineis evidently risky, but may alsobea rewarding income play for the bold.
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