Phoenix presents a juicy yield nicely supported by money streams | USAEMALL.com

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The stock market runs on aphorisms and golden rules. There’s one for every type of situation and many an investor has been saved from costly traps by heeding them.

One widely used adage, if it looks too good to be true then it probably is, is often applied in the case of high-yielding shares. If you’re tempted, at the very least expect to do some research to ensure the yield is at that level for the right reasons and appears affordable and sustainable.

Healthy levels of cash generation is a reassuring sign; an expensive debt pile isn’t — cash might need to be funnelled into interest payments. There’s little comfort either in a high yield caused by a steep fall in the share price.

That tells you investors have concerns about the company and its ability to maintain payouts. Beware dividend cuts — they are usually punished harshly. Even Shell, a dividend-paying stalwart that cut its dividend for the first time in eight decades in the middle of the pandemic oil crisis, saw its share price ruthlessly marked down in response, although in struggling Vodafone’s case, the dividend cut it made earlier this year had long since been priced into the shares.

But the rules change when there’s no mystery about how the dividend is being funded. Phoenix, the long-term savings and retirement business, offers a juicy 10 per cent yield but that’s well supported by the streams of cash being thrown off by the closed book of life insurance policies it has built up in recent years.

BUY: Phoenix (PHNX)

Adverse movements in the hedging position made the reported results for Phoenix difficult to interpret as the insurer uses hedging primarily to ensure the stability of its cash and the dividend. The downside is that adverse movements make the IFRS accounts deceptively grim reading, with a knock-on effect on shareholder attributable equity that management acknowledged was a problem in the short term.

Nevertheless, the results on their own terms were a qualified success as the company clearly looks on course to meet its target of cash generation of £1.4bn-£1.5bn for 2024 after generating £950mn during the half; organic cash generation was up 19 per cent to £647mn.

Broker Peel Hunt said: “We remain positive long term on Phoenix, as its business model transitions towards becoming a broad-based pension provider, and the back book continues to throw off a significant amount of cash (cash yield c20 per cent).” We agree with that view, with the shares trading at 1.1 times tangible assets and a hefty 10 per cent dividend yield.

HOLD: Oxford Metrics (OMG)

A profit warning from Oxford Metrics sent shares in the smart sensing and software group down to a six-year low.

The directors report that customers are being more cautious, which has lengthened buying cycles and pushed opportunities in the sales pipeline into the new financial year. They are now guiding shareholders to expect annual revenue of £40mn-£42mn in the 12 months to September 30, below both the consensus estimate of £48.6mn and last year’s revenue of £44.2mn.

The life sciences and engineering segments, accounting for around half of Oxford Metrics’ revenue, are performing slightly down on last year. However, the entertainment sector has been hit by the slowdown in the global games industry and a contraction in content creation. The segment accounts for more than a third of group revenue.

The group’s financial position remains robust. Closing net cash of £50mn provides firepower to make bolt-on earnings-accretive acquisitions. Analysts still expect the full-year payout per share to be raised 10 per cent to 3.02p.

HOLD: Card Factory (CARD)

Card Factory shares fell by more than 15 per cent earlier this week after the greeting cards and gifts retailer reported a 43 per cent decline in interim pre-tax profits, a painful reminder of wage inflation pressures even if management had previously guided that earnings growth would be weighted to the second half.

It was the scale of the profit decline that unnerved investors, as the bottom line was hit by the 9.8 per cent jump in the national living wage in April and freight inflation. Gross margin fell 420 basis points to 32.6 per cent, hit by store and warehouse wages coming in at 28 per cent of revenue compared with 24 per cent in the same period last year.

But full-year expectations were kept unchanged, as were medium-term targets of £650mn of revenue, pre-tax profit margins of 14 per cent and 90 net new stores by 2027. A rating of nine times forward consensus earnings, combined with a 7 per cent forward free cash flow yield per Panmure Liberum forecasts, is an attractive proposition. But cost pressures remain challenging.