Hargreaves Lansdown (LSE: HL) shares took an 11% hit yesterday. The FTSE 100 financial services company reported its full-year results on Monday. And judging by the stock price performance, it’s fair to say the market wasn’t pleased.
So is this a buying opportunity for me? Well, I’m not dipping my toe in just yet. I’ve placed Hargreaves Lansdown shares on my watch list. And here’s why.
Bull case
I don’t think the results were that bad. During the 12-month period, it saw £8.7bn of net new business. This is a sizeable amount. It also delivered strong growth in its Assets Under Administration, which improved by 30% to £135.5bn.
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This is good news for Hargreaves Lansdown. The more funds it has under management, then it can generate higher fees. What I found encouraging was that it has managed to increase its client base during the year by 233,000. In fact, the company has reported that it has seen a change in its customer demographic mix.
It’s seeing younger people using its services. The pandemic was clearly catalyst as it has given consumers time to reflect on their personal finances. The median age of its customer in 2014 was 54 and in 2021 it’s now 46.
Again, this is positive for Hargreaves Lansdown as it’s diversifying its client base. Even the firm highlights that getting customers earlier on to its platform means that it can support them for longer. The company has an opportunity to cross-sell its products and thus boost its overall revenue. This should work out well for the shares in the long term.
Bear case
But it wasn’t all great news. And there were a few reasons why Hargreaves Lansdown shares took a hit. The first one was the disappointing dividend. The company decided to pay out a total income for 2021 of 50.5p, which was 8% lower than last year.
The second was the fall in profit before tax of 3% to £366m compared to the previous year. It’s worth noting here that 2020 profits included a £38.8m one-off gain from the sale of its data business, FundsLibrary. So if this disposal is removed from last year’s numbers, profits actually rose by 8%.
But investors are accustomed to seeing growing profits. So any dip in profitability is going to be viewed as a negative and hence the stock is likely to fall. This is what happened to Hargreaves Lansdown shares yesterday.
As I said, the pandemic resulted in more people looking at their personal wealth and trading stocks. But the lockdown restrictions have now eased and even Hargreaves Lansdown has said that it has “seen a slowdown in dealing volumes and client activity versus the elevated levels this time last year”.
The company claims this is normal for this time of year and in line with its expectations. But I’m taking this with a pinch of salt. I reckon this fall could continue over the coming months as normality starts to resume.
Should I buy?
I’ll only be monitoring the stock for now. I reckon yesterday’s price fall was a reality check. The trading boom it saw last year won’t last forever. The shares also trade on a price-to-earnings (P/E) ratio of 28x, which is too high for me. Hence I’m not buying just yet.
