Wealth management company Rathbone (LSE: RAT) has released an upbeat trading report for the three months to 30 September. It shows that the company has positive momentum in its business and that its strategy is performing well. But is it worth buying for the long term?
Rathbone’s total funds under management increased by 8.5% to £33.2bn in the quarter. This compares to a rise in the FTSE 100 index of 6.1% and means that Rathbone’s net operating income was 18.5% higher than in the same quarter of 2015.
This is an excellent performance during a challenging period for the investment industry, with investor fears being higher thanks to the uncertainty surrounding Brexit. Of course, Rathbone has been boosted by favourable investment performance, but it has also delivered continued business growth. Its unit trust business posted a particularly strong result, with net inflows of £170m.
However, the collapse in long-term bond yields re-emphasised the need for a review of the company’s defined benefit pension schemes. Rathbone has begun to engage the trustees and affected employees of these schemes with a view to their closure. It will also conduct a placing in order to increase its regulatory capital and provide additional financial flexibility.
Looking ahead, Rathbone is forecast to increase its bottom line by 13% in the next financial year. This has the potential to boost investor sentiment in the stock and push its share price higher. Rathbone trades on a price-to-earnings growth (PEG) ratio of only 1.1, which indicates that it offers excellent value for money.
With a yield of 3.2% that’s covered 1.9 times by profit, its income appeal is also high. Rathbone could afford to raise dividends at a faster rate than profit growth over the medium term and still maintain a healthy level of dividend coverage.
A better buy?
In fact, the company has better near-term income prospects than financial peer Barclays (LSE: BARC). That’s because banking giant Barclays currently yields only 1.7% as a result of a reduced dividend. It decided to cut shareholder payouts in order to improve its financial standing.
While this is obviously disappointing for income investors in the short run, the decision should help to create a financially stronger and ultimately more profitable business in the coming years. This should allow dividends to rise – especially since they’re covered 3.5 times by profit.
Barclays is forecast to increase its bottom line by 66% in the next financial year. This puts it on a PEG ratio of just 0.1, which indicates that it offers growth at a very reasonable price. Certainly, it faces an uncertain outlook, but with a wide margin of safety Barclays represents excellent value for money at the present time. In fact, while Rathbone is a sound buy, Barclays has the superior risk/reward ratio of the two financial companies right now.
