IG Group Holdings (LSE: IGG) is a spread betting and CFD trading firm, one of the largest and oldest operators in this space. Although new regulations have cut into its profitability, it has taken large strides in the correct direction by reorganising itself and re-focusing its attention on new markets. Here’s why I like this business.
Great dividend, fair price
Shares of IG currently yield a very attractive 8%, which far outstrips the average for the FTSE 250 as a whole (3.1%). With a P/E ratio of 12.5 it doesn’t look too expensive either. So what is making investors shy away from buying this stock?
IG’s stock price fell sharply in September 2018 on news that regulatory changes had made a significant dent in sales and haven’t really recovered since then. While that doesn’t sound particularly inspiring, there are reasons to believe that the outlook will improve. After re-categorising its various markets into ‘core’ and ‘significant opportunities’ and streamlining its approach, management now expects ‘significant opportunity’ revenues to increase by more than 35% a year, from £60m in 2019 to £160m in 2022. For comparison, core market revenue is estimated to total £415m this year.
IG’s balance sheet is also very strong, with a large pile of cash available on hand — in its recent annual report, the company showed that it had £375m in liquid assets, more than enough to cover the £111m dividend due. This has allowed management to promise to leave its 43.2p per share dividend unchanged, despite the regulatory setbacks. This should soothe any fears that income investors may have regarding the sustainability of the payout.
The big picture
Spread betting firms require significant volatility in the markets to attract customers. Therefore, a disorderly Brexit could provide a boost to the stock, as argued by my colleague Roland Head. In that sense, IG could prove to be a hedge against a broader market downturn.
IG isn’t immune from all geopolitical risks, however. A Jeremy Corbyn-led Labour government would likely be quite hostile towards trading and financial services firms — several years ago he argued for the introduction of a ‘Robin Hood’ tax that would levy a 0.5% stamp duty on share dealing and other forms of trading. The prospect of a Labour government is widely considered to be bad news for stock prices across the board, but one would expect that companies like IG would suffer the most in such a scenario.
With all that being said, I still think that IG is well-positioned at the minute. Its fair valuation and highly attractive yield make it an intriguing income play that should hold up well in a turbulent investing environment. Admittedly, it is at risk from further regulatory clampdowns and potentially an unfriendly government. But overall, I think it warrants at least a small position in an income portfolio.
