Our view Buy
Share price 508.5p (+27p)
Here's an interesting statistic from Numis, the broker. In the US some 65 per cent of investments (unit trusts and the like) are sold after advice. In the UK that figure is more like 80 per cent. That could soon change very quickly and Hargreaves Lansdown would appear to be well placed to benefit.
The Financial Services Authority wants to make charges levied by financial advisors more transparent and is likely to require them to be spelled out and agreed before any selling is done, as part of its review of the way financial products are sold – the retail distribution review or RDR.
It remains the case that clients could well baulk when told that the person advising them charges £200 an hour for the service (they are supposed to be told that now, but it isn't always very clear). Many people may feel they could do the job for themselves with the help of a bit of research. They might be right.
That is where Hargreaves comes in. It offers a fund platform, administering billions of pounds for its clients and enabling them to transfer money here and there hassle free. For a fee. It also provides research, generic advice and opinion.
One of the ways HL is remunerated is through commissions from fund managers who are on the platform. The FSA doesn't like this – the watchdog doesn't think it is very transparent – and the shares took a hit when it said this could be barred under the RDR.
But even if this is the case, HL insists it won't be badly hurt and can work with the proposals, at least as they stand.
In the meantime the company said yesterday it had enjoyed a buoyant end to the 2011-12 tax year, with clients (as ever) pouring funds in to beat the ISA savings deadline. Assets under administration rose from £23.4bn to £26bn in the first three months of 2012.
Markets remain choppy, and clients are skittish. However, what is true is that people with sufficient funds to use Hargreaves Lansdown aren't getting any return from the alternatives to equities so they're holding their noses and taking the plunge.
A fresh market reverse, it is true, would hurt HL but then it would probably hurt everyone.
What the trading statement does do is provide a picture of a business in good financial health, moreover one that has no debt and enough surplus capital to keep regulators happy. With this being the case, and with HL's operations generating lots of cash, it can afford to pay out most of what it makes in dividends.
Right now the shares offer a forecast yield of 4.6 per cent for the year ending 30 June, rising to 5.4 per cent in 2013.
However, they trade on nearly 20 times this year's forecast earnings (although those forecasts could look conservative), falling to 17 times next year on Numis numbers. That is quite high compared with most fund managers, but HL administers funds, it doesn't manage them. So the comparison doesn't really hold. And it is just about the biggest beast in the jungle, operating in a business that will probably favour big beasts which can price competitively for the long term.
The last time we looked at HL we said avoid. The shares were then at 500p. They are now not much changed. But I'm beginning to think that HL is in the right place at the right time. So it might be worth tucking a few of the shares away.
That leaves only the following question: is now a good time to buy or would it be better to wait for the shares to ease and that multiple to come down a bit.
I'm inclined to jump in now. The shares were considerably higher than they are now before the stock market's August wobble last year, and they haven't recovered from that.
By historic standards they arguably aren't, therefore, quite as expensive as the headline numbers would suggest.
With the company's financial health making the dividend look secure (HL pays out 65 per cent of earnings, plus a special dividend if it has made enough), I would now be a buyer.