US Edition IG Group
481p -37½
Questor says HOLD
The shares have shown substantial gains since they were initially recommended, rising almost 90pc since January 2009, However, Questor does not feel it is the time to sell – and it's all about the dividend.
IG Group is forecast to pay a dividend of 20p this year. This means investors who bought in on the original tip at 254p will see a yield on the initial investment of a very impressive 7.9pc. If you took the money out of IG Group, would you be able to find a yield as impressive anywhere else?
The highest level that Questor has recommended buying the shares was 409.2p in March last year. Even at that level, the yield based on the initial entry price is an attractive 4.9pc. Note the current yield for new investors would be in the order of 4.2pc.
Regular readers will know that Questor believes that a dividend reinvestment strategy should be the cornerstone of any investment portfolio. Over the years, it's a form of turbocharging. If history is anything to go by, reinvesting this yield for the next few years should provide you with a really impressive rate of return – far higher than that implied by the share price gain.
Of course, the argument is null and void if there is a chance of losing a substantial amount of your capital – therefore yesterday's warning is a concern. So what does IG's future hold?
Well, the company said that trading in the first half had been subdued. There has been less volatility than there was in the equivalent period in the preceding year – and companies such as IG benefit from volatility.
"If activity levels remain similar to those seen recently, we expect profits to be slightly below current market expectations," IG said.
Questor expects these consensus figures will now move down by a few percentage points, which is not too concerning.
The group posted a loss in the six months to November 30 – but this was down to a charge taken for its troubled Japanese unit. This will hopefully help to draw a line under the situation.
The pre-tax loss was £69.1m, compared with pre-tax profits of £69m in the preceding year. Net trading revenue rose by 9pc to £156.7m. The impairment was £123m in respect of goodwill and £20.1m in respect of the customer relationships.
The troubles at the unit are well documented. Japan recently introduced limits on foreign exchange transactions and equity index trading. This has hit the business there hard. For example, the amount of leverage allowed on equity index transactions has been cut to 10 times. The company had previously been offering a leverage limit of 100 times.
However, management expects the Japanese unit to return to profit in two to three months once its headcount is reduced.
Reassuringly, there was good news on the all-important dividend too. The interim payment was raised by 5pc to 5.25p and it will be paid on March 1. IG also reiterated its payout target of 60pc of adjusted profits after tax.
The shares are trading on a May 2011 earnings multiple of 14.1 times, falling to 12.5 next year. Hold.
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