The dividend forecast for Phoenix Group (LSE: PHNX) shares is unbelievably excessive for the time being. Presently, analysts anticipate a payout of 53.9p per share this yr and 55.5p subsequent yr. So, at at the moment’s share price of 505p, we’re taking a look at yields of a whopping 10.7% and 11%.

Can these forecasts be trusted? Are shares within the UK insurance coverage and financial savings firm dangerous? Right here are some things buyers must find out about Phoenix Group and its huge dividend.

Low dividend protection

There are definitely some pink flags in relation to Phoenix’s dividend payout.

Presently, dividend protection (the ratio of earnings to dividends) right here is in adverse territory, that means that earnings received’t cowl dividends within the close to time period.

For 2024, earnings per share are forecast to return in at 46.5p. So, we’re taking a look at a ratio of 0.86.

This doesn’t essentially imply that the dividend payout is unsustainable. But it surely’s not excellent. Typically talking, a ratio underneath 1.5 is a warning {that a} dividend payout will not be protected.

One other pink flag is the yield itself. When an organization has a very excessive yield like Phoenix Group does, it’s typically a sign that the market doesn’t consider it’s sustainable (the ‘smart money’ has dumped the inventory pushing the yield up quickly).

So, there’s some uncertainty in relation to future payouts right here, for my part.

Loads of money move

The excellent news is that Phoenix Group is producing loads of money move at the moment. And money move is an important ingredient in dividends.

Within the first half of 2024, the group generated whole money of £950m. And it just lately suggested that it’s on monitor to generate money of £1.4bn-£1.5bn for the complete yr.

Final yr, dividend funds solely value the corporate a complete of £520m. So in principle, there needs to be sufficient money to deal with the present dividend forecast.

Is that this a dangerous inventory?

As for the general threat degree of the shares, that’s laborious to evaluate.

The shares do look fairly low-cost at the moment. Presently, the price-to-earnings (P/E) ratio is simply 10.8.

However right here’s the factor – the shares have seemed low-cost for years and nonetheless gone backwards. Over the past three years, the inventory has misplaced about 25% of its general worth (offsetting features from dividends).

Share price efficiency over the long run has been fairly poor too. Over the past 10 years, the share price has declined.

The corporate does have a three-year plan to spice up efficiency. And administration is assured that it’s constructing a rising enterprise that’s on monitor to create shareholder worth.

Nevertheless, there’s fairly a little bit of debt on the steadiness sheet (£3.7bn in borrowings on the finish of H1). This provides threat.

One other threat is that the Monetary Conduct Authority (FCA) just lately launched a market examine into gross sales of ‘pure protection insurance’ merchandise following concern that the design of some fee constructions might result in poor outcomes for policyholders. Because of this, Phoenix stopped the sale of its SunLife enterprise, stating that the uncertainty round commissions was a priority for potential purchasers.

Placing this all collectively, it’s clear that buyers must weigh threat and reward right here. Whereas the yield is excessive at the moment, I really feel there’s no assure that general returns from the shares can be sturdy within the years forward.