The London Stock Exchange share price slides, is this stock a good investment?

The London Stock Exchange Group is strategically placed to ramp up its income streams and grow. As its share price slips, is it a sensible investment?

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The London Stock Exchange Group‘s (LSE:LSE) 2020 full-year results were solid, thanks to profiting against a volatile economic environment and its $27bn acquisition of Refinitiv. On Friday, the company posted higher full-year profit and sales, while total income strengthened 5% to £2.44bn and operating profits rose 5%. But the London Stock Exchange share price fell in response as future expenses look much higher than predicted.

Data doesn’t come cheap

In a world where data is becoming the lifeblood of companies seeking an edge, the Refinitiv acquisition is strategic. And the data and analytics company is strengthening the core of the London Stock Exchange. The acquisition will help the group raise its global footprint as a provider of sought after data, analytics and capital markets information and infrastructure.

But integrating and strengthening doesn’t come cheap. The Refinitiv integration is expected to cost £1bn this year alone. This is significantly higher than expected, and the London Stock Exchange share price dropped as much as 14% on the news. It means it could be years before the benefits of owning Refinitiv pay off.

For the Refinitiv transition to complete, the company agreed to sell Borsa Italiana, the Italian stock exchange, to gain approval from European antitrust authorities. It’s agreed to sell to Euronext for €4.3bn.

Lucrative income stream

The new and improved London Stock Exchange Group should eventually bring in a steady and lucrative income from subscription payments. This will provide a level of income security from its previously volatile exposure to trading swings in the markets.

I think the acquisition is smart, but integrating legacy systems seamlessly is no easy task. For Refinitiv customers to be retained, it’s vital that the transition is flawless. That’s most likely where the added expense comes in. Unfortunately, the company chief has also hinted that job cuts are on the cards. This indicates further pain might be ahead for the share price.

The London Stock Exchange share price has recovered to pre-pandemic levels and is now up a nominal 1% in a year. Increasing its long-term appeal, the Exchange increased its dividend by 7% bringing it to 75p. This gives it a yield of 0.92% at today’s share price.

London Stock Exchange share price looks expensive

Today the company has a $37bn market cap and a price-to-earnings ratio of 64. That shows a very expensive stock, potentially overvalued based on speculation of future income.

I think the company is great and could become much stronger with time. If the integration goes smoothly, it should bring the business a competitive edge.

But London, as an international and connected financial hub, is in a precarious position since Brexit. Recent headlines proclaim that Amsterdam and New York are set to take its crown. That said, if London can continue to attract new and lucrative listings, then the London Stock Exchange Group could become stronger than ever.

Caerus Mineral Resources is the latest company to reveal a planned London IPO. This follows hot on the heels of Deliveroo and other notable names such as Moonpig, Dr Martens and Parsley Box.

If I owned shares in the London Stock Exchange I’d continue to hold, but I won’t be buying today because I think it’s expensive.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kirsteen has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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