Hargreaves Lansdown (LSE:HL.) is now among the smallest companies on the FTSE 100 after shedding 54% of its market value over the past three years.
Currently trading at 762p, the sell-off has gone too far. Here’s why I’m continuing to buy Hargreaves Lansdown shares — on the Hargreaves Lansdown platform — for my portfolio.
Earnings due
Hargreaves is due to publish its full-year results on 19 September. Interestingly, this is more than a month later than last year.
So what can we expect? Well, it’s never easy to tell. I’m anticipating we will see a further drop in trading volume. After all, investor sentiment is at a real low in the UK — it may have hit a nadir, according to some analysts.
Falling investor activity is the main reason this stock has shed more than half of its value since the pandemic. Another downtick in activity, engendered by the cost-of-living crisis, will unlikely be well received.
However, there is one huge tailwind…
Net interest income
You’d be forgiven for not realising that Hargreaves Lansdown is net beneficiary of higher interest rates. In fact, in previous years results, net interest income has barely featured.
While Hargreaves has previously earned the majority of its income from fees on investor activity, it also lends investors cash, held on the platform, out to the market.
At the end of 2022, approximately 12% of the £132bn in consumers’ assets on the platforms were held in cash. This means Hargreaves had around £13.5bn it could lend to the market.
As interest rates have risen, the returns on this income have grown significantly. In the H1 report, cash was noted as the firm’s highest margin asset class.
| Asset class | Margin (basis points) |
| Cash | 168 |
| Funds | 40 |
| Shares | 30 |
| HL funds | 66 |
During H1, Hargreaves generated £121.6m from clients’ cash holdings — representing 35% of total revenue. This return on cash represented a 976% increase year on year.
So what does this mean for full year earnings? Well, interest rates have continued rising since the end of H1, so it’s seem likely that this margin on cash will have grown further. I wouldn’t be surprised if this revenue stream has generated £250m+ for the year as a whole.
In turn, this contributes to the stock trading at just 11.4 times forward earnings — far below its five-year average.
Why I’m buying
While I expect this interest rate tailwind to continue through the medium term, it’s not the main reason I’m buying.
Despite increased competition from other brokerages, I still see Hargreaves as the standout offering in the sector.
It has a user-friendly interface and I don’t find it’s charges prohibitive. This is why it has four times more active users than the second most used platform in the country.
And while the cost-of-living crisis represents a near-term concern for investment activity, in the long run I expect to see more and more people managing their own finances.
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So when the cost-of-living crisis recedes, I still see Hargreaves as being in pole position to dominate the sector.
