Broker tips: Phoenix Group, Johnson Matthey

(Sharecast News) - Bank of America Merrill Lynch downgraded Phoenix Group on Thursday to 'neutral' from 'buy', stating it now only sees 13% total return potential. The US bank said Phoenix's new chief financial officer addressed its key issue - falling shareholders' equity - with the group's full-year results, noting that he provided confidence that its dividend was sustainable and that it will grow progressively.

Bank of America said Phoenix's 8.5% 2025E dividend yield remains attractive, as well as being the third highest dividend yield in the FTSE 100, and that with 2.5% per annum growth ahead, the stock 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."

BofA added that potential rebranding of the group to Standard Life, as reported in the Financial Times, may help affirm the perception that this is a growth company, but thinks growth in shareholders' equity will also be required to build this confidence.

Analysts at Berenberg raised their target price on Johnson Matthey from 1,380.0p to 1,800.0p on Thursday as it said the firm had "successfully navigated a fork in the road".

Berenberg said Johnson Matthey's share price has "quite justifiably rallied" by over 20% since the announcement on 22 May that it would divest its Catalyst Technologies segment to Honeywell for £1.8bn, or a 13.3x enterprise value/underlying earnings ratio.

"The decision to divest for a multiple higher than the group may not only benefit JMAT's valuation directly, but it also removes the narrative dissonance caused by growth-oriented and cash-cow

businesses being housed in the same company," said Berenberg. "Now, there is no such contradiction. JMAT has embraced a role as a brutally effective cash generator, even if earnings appear likely to begin declining in the late 2020s."

The German bank stated the new group has an "endearing simplicity" that may highlight its quiet success in restoring margins in its Clean Air segment. However, Berenberg said it may also leave the remaining company a potential private equity bid target.

Berenberg reiterated its 'hold' rating on the stock.