Is Phoenix Group’s share price inflation-proof?

Phoenix Group’s [PHNX.L] share price has proven resilient this year compared to the wider FTSE 100. The insurer has said that the current inflationary pressure will have “no material financial impact”. A rising dividend and strong half year results could add to the investment case.

Phoenix Group’s [PHNX.L] share price has proved to be more resilient than the wider FTSE 100 this year. And when combined with Phoenix Group’s policy of hedging against inflation, the stock could be worth further investigation.

CityAM identified Phoenix Group’s share price as one to watch in September. This was based on numerous reasons but perhaps the most interesting is the company’s hedge against inflation. (The other stocks that the publicationaper rated were FRP Advisory Group [FRP] and defence technology firm QinetiQ Group [QQ.L]).  An added bonus for investors worried about investment incomeperformance is Phoenix Group’s policy of sustainably increasing its dividend.

Phoenix Group outpaces FTSE 100 

Phoenix Group’s share price has dropped 2% so far this year, which is better than the FTSE 100’s near 7% drop over the same period.  However, over the past month Phoenix Group’s stock has fallen more thanover 7% over the past month, compared to the outpacing the FTSE 100’s 4% drop.

On Friday 25 September, the share price fell 2.8% as markets reacted to UK Chancellor of the Exchequer Kwasi Kwertang’s ‘mini-bBudget’. The continued reaction to this pronounced shift in economic policy  will likely have a knock-on effect on Phoenix Group’s share price, as well as the wider market over the coming months.

Phoenix Group as an inflation-proof play

Rising inflation means it makes sense to look at companies that perform well in tough economic conditions. At the time of writing, UK inflation was at 9.9%, with the Bank of England predicting that it will rise to over 13% in the next few months. The bank predicts that inflation will be back to around 2% in the next two years.

Phoenix Group’s stock could be one option, especially as the company has said that the current inflationary pressure will have “‘no material financial impact”’.  To mitigate against inflation, the company  Phoenix Group manages inflationary risk through inflation linked annuities, which are hedged with index-linked to gilts. It also hedges expenses of policy administration and operating costs. According to Phoenix’s half year report, aan 80bps rise in inflation would have a £200m0.2bn impact on its £11.8bn long-term free cash position held at the end of 2021.

Strong half year results certainly help the stock’s investment case. Phoenix delivered cash generation of £950m in the first half of 2022, up from £872m from the same period last year. Long-term cash generation from new business was £430m, up from £206m in the first half of 2021. The company’s workplace pension business delivered £1.7bn in net inflows for the first half of the year, handily reversing the £2000.2mbn net outflow from the same period in 2021.

A solid balance sheet showed that Phoenix had a Solvency II sSurplus of £4.7bn on 30 June 2022 and had managed to pay off £450m worth of debt. The company now has a Solvency II sShareholder cCapital cCoverage rRatio of 186%, up from 180% for the full year 2021.

Rising dividend

The better than expected results were due to demand in its pension policies and higher interest rates.  For the full year, Phoenix said it is ‘confident’ that it will deliver in  thein the top end of its 2022 cash generation target of between £1.3bn andto £1.4bn.

Another plus for investors worried about inflation chipping away at returns is Phoenix Group’s dividend. The company offers 7.8% forward dividend yield — - one of the top 10 among FTSE 100 stocks. Following half-year results the company upped its  dividend to 24.8p, a 3% increase year-on-year, and equal to 2001’s final full year dividend. 

Phoenix’s board will reassess whether organic growth can further boost the dividend, along with a 2.5% boost from the the acquisition of Sun Life of Canada’s UK operations ahead of its full year 2022 results,.

Of the 17 analysts polled on the Financial Times, Phoenix Group’s stock has a 743p median price target, which . This suggests a 27.3% upside on Friday’sfrom its close of 583.6p on 23 September.