The $Lambda_b^0toLambdaphi$ decay is observed using data corresponding to an integrated luminosity of 3.0fb$^{-1}$ recorded by the LHCb experiment. The decay proceeds at leading order via a $bto sbar{s}s$ loop transition and is therefore sensitive to the possible presence of particles beyond the Standard Model. A first observation is reported with a significance of $5.9$ standard deviations. The value of the branching fraction is measured to be $(5.18pm1.04pm0.35,^{+0.67}_{-0.62})times10^{-6}$, where the first uncertainty is statistical, the second is systematic, and the third is related to external inputs. Triple-product asymmetries are measured to be consistent with zero.