Source: Sharecast
It said the shares have returned 32% year-to-date and it now only sees 13% total return potential, hence the downgrade.
The bank said Phoenix’s new chief financial officer addressed its key issue - falling shareholders’ equity - with full year results.
"He provided confidence that the dividend was sustainable and will grow progressively. But the yield no longer stands out versus peers," it said.
It said Phoenix’s 8.5% 2025E dividend yield remains attractive and the third highest dividend yield in the FTSE 100 and that with 2.5% per annum growth ahead, Phoenix retains appeal.
"However, this yield must be seen in the context of a UK 10-year bond yield at 4.7%. The yield spread over the sovereign yield of 3.8% is in the bottom-half of European insurers. Phoenix’s yield is also only the third highest in UK Life insurance and only around the same level as Aviva pro-forma for its Direct Line Group (DLG) acquisition if buybacks are also included."
BofA said Phoenix’s declining shareholders’ equity remains a concern for it, even after these concerns were addressed by the new CFO.
"Shareholders’ equity is still set to decline until 2027E," it said. "The stock trades on 8.6x 2026E shareholders’ equity, and even 1.8x 2026E total comprehensive equity. These multiples may raise concerns for some investors, even if the concerns are driven by accounting rather than economics."
The bank said that any increases in UK 10-15 year bond yields could further exacerbate concerns.
"Phoenix’s new business growth has been phenomenal since the acquisition of Standard Life (SL) in 2018," it noted.
"Phoenix has grown from zero new business franchise to one of the fastest rates of contractual service margin (CSM) growth in the sector (6.7% CAGR 2024-27E). We expect growth to slightly slow but remain above sector average."
It added that potential rebranding of the group to Standard Life, as reported in the Financial Times, may help affirm perception that this is a growth company, but it thinks growth in shareholders’ equity will also be required to build this confidence.
At 0930 BST, the shares were down 3% at 623p.
