Hargreaves Lansdown is a name we’ve all heard of. It’s the dominant leader of the investment platform market and its 40% market share is about four times that of its largest competitor.
Despite its size, it’s still growing quickly with a ten-year dividend growth rate of almost 17% per year.
That’s impressive, but perhaps more impressive is the company’s astronomical 70% average ten-year return on capital employed.
In fact, Hargreaves Lansdown is so profitable that the FCA has launched an investigation into the competitiveness of the investment platform market (although I guess those two facts could be unrelated).
Hargreaves Lansdown’s massive growth and profitability are extremely attractive features, but that attractiveness has driven the share price up and the dividend yield down, and today the company’s dividend yield is well-below 2%.
For some income investors, a sub-2% dividend yield will be unacceptable, and that includes me. But perhaps I’ll make an exception for a company as exceptional as Hargreaves Lansdown.
You can read my full review of Hargreaves Lansdown from this month’s Master Investor magazine below:
Is Hargreaves Lansdown suitable for income investors?
Hi John,
I agree with pretty much everything you have written here. The only threat to HL is potentially the Finctech sector who knows with the right backing HL may face some serious competition in the future.
Uber and deliveroo are examples of how this sector is turning things upside down.
Hi John,
Just wanted to clarify that although Uber and Deliveroo are not under Fintech category they possess similar operating model in terms of there disruptive nature ( I’ve realised that my initial statement has not clarified that which is why I’ve expanded on my statement).
In a relatively short period of time, both companies have managed to change the status quo for the traditional provider of these services. Taxi was traditionally a regional monopoly but individuals have been forced to up their game because of Uber. Whilst courier for food service was provided directly by restaurants/take away but now Deliveroo has managed to edge into the market. These two companies have managed to consolidate a fragmented market clearly showing how rapidly a disruptive company can grow.
HL has a consolidated share making it vulnerable to these Fintech/startups as they only have to outcompete with HL. It’s unlikely they will be profitable because it will need a stupendous amount of capital to compete with HL. Then again given how free money has been showered on so many startups without any care for profitability I doubt it will deter these high-risk investors.
Unfortunately for HL, it can mean a drop in short-term profitability if this worse case scenario plays out.
Hi Reg, I think you’re right in that the investment platform market is exactly the sort of market which is well-suited to ‘aggregators’, i.e. platforms that bring together suppliers and customers, such as Uber bringing together drivers and passengers or Deliveroo or Just Eat bringing together suppliers and customers for food and whatever else (and perhaps Amazon is the ultimate aggregator now that it has an established third-party marketplace).
I’m sure lots of companies will try to take down HL, and many already are with companies like Nutmeg or Wealthify looking to ‘appify’ investing.
Their problem is that the market already has a dominant aggregator, which is HL. It’s scale means investors go there because of the range of products and social proof (i.e. if everyone else uses HL then it must be trustworthy) and because all the investors are there then all the fund houses want their funds on their too.
And of course size gives HL massive economies of scale advantages, so if it wanted to it could slash costs in a price war and those startups would probably have to suck up losses for years to build scale.
But as you say, free money and willing investors are driving a lot of investment in all manner of startups, so perhaps this is how it will go. But personally I’d be amazed of someone other than Vanguard or similar could oust HL from the top spot.
Good article John,
As an AJ Bell customer I will look to partake in the share offering as a customer later this year or early next. These are very profitable companies, AJ Bell is much smaller of course.
On this statement :-
” For me, it’s the balance of yield and growth that matters, rather than just the yield.”
This is in my humble view a grey area for many because the perception of yield is whether a company choses to pay a dividend. The dividend is not the “yield” it is only how the company decides to distribute (use) the yield on it’s business.
In fact for yield investors they should not want dividends since they are taxed and should you want to reinvest the money back in the company it’s going to cost you the tax on the dividend paid out and all the costs to buy back in, like dealing charges and stamp duty.
Real yield producers are companies that can reinvest the money they earn (yield) at a higher rate of return that you can get by investing your post tax dividend income.
I think this topic has been raised before now, but it still is very much misunderstood I think.
Your target of 1200 has been helped today and in fact since the article was written the share price has fallen from 2200 to 1850 giving a higher dividend (not yield) % payout 🙂
LR – ever the pedant of course – who me?
Hi LR, it sounds like you’ve been reading Terry Smith’s latest article on why he doesn’t invest for income!
From a technical point of view, cash generated by the business should go into whichever ‘bucket’ will produce the best returns. That could mean maintaining the business, expanding the business, paying down debt, buying back shares or paying dividends (on the assumption that shareholders can at least generate the market rate of return on those dividends, e.g. by investing it into a tracker).
Most of the companies I own have an above-market rate of return on their capital, so dividend payments should be a last resort. However, most mature companies cannot retain all the cash they generate because they don’t have that many opportunities to invest it wisely in new stores, factories or whatever, so dividends are entirely sensible for most large mature businesses (which is what I invest it).
I realise that non-dividend payers can be good investments, but to be honest I don’t trust companies enough to rely entirely on capital growth for my returns. If I hold a company for five years and it has a 5% dividend yield, I’ve received a 25% return which I can reinvest elsewhere, regardless of what happens to the company (e.g. a deranged CEO turns up and drives the company off a cliff).
So dividends are a form of defence against an uncertain future.
But I also like to see cash (actual hard cash) dropping into my trading account each month. It’s a good form of motivation, for me at least.
And I like the idea of using dividends for retirement income because there is approximately zero chance that I’ll run out of money, no matter how long I live. Whereas if you sell shares to generate an income you get into arguments about what is the Safe Withdrawal Rate, and that question completely goes away if you use dividends as income (assuming you invest in at least half decent companies).
As for the stock market decline, it’s certainly clobbered some of my shares.
As always, the best advice is to Keep Calm And Carry On Investing.
“”e.g. a deranged CEO turns up and drives the company off a cliff””
Good point John – and as of today you can include the CAKE CFO who doesn’t appear to have moved toward the cliff, because the suitcase full of cash was weighing him down, no?
Anyhow, and joking aside, yes I did read Terry’s article in the FT, but it was a much more famous old investor that established the theory.
Not to do the balance an injustice, I agree in practice, because a large % of my annual income comes from just that – dividends.
On the HL price, yes it was one I missed out on, but 12-13XX would seem like a better entry point if it ever arises.
He ho – onward and upward.
LR
Hi, John, I want to add another thing about the beauty of dividend investing it gives you perspective. Often we become so fixated on the price of the stock but by focusing on dividend it makes you concentrate on the returns you can get on an investment rather than the price you can achieve from selling your holding. Therefore the company itself.
With this mindset, it should help you identify the intrinsic value for a stock. An example I frequently mention to my brother is BP. In 2010 with the oil spillage the price torpedoed downwards and people were desperate to sell their holdings. At the time I never contemplated investing but I casually mentioned to my brother that BP would be fine for a number of different reasons including:
Being too big to fail
Strong lobbying power
Vital industrial production depends on BP Oil
Huge profits which could easily clear any fines.
Therefore I couldn’t understand why the share price went down. At that time stock price went from £6.30 to £3.22 since then it still has continued to pay dividend all though at a slightly lower amount. However, if you had invested £5,000 when that incident took place you would have made approximately £2,651 from dividends and your holdings would have been worth £8,029 now. In total, you would have made £10,680.
If we use inflation that £5,000 would now be worth £4,083 if just kept in the bank account with the no interest rate scenario or £6,092 if by a miracle you got an interest rate of 2.5% from the bank. Compared that with the £5,680 you would make with the dividend and appreciation of the share price from investing in BP. The best thing is your annualised rate of return would have been 14% which isn’t shabby at all.
One thing I would say is that what LR said is important to take into consideration because sometimes when you rely just on dividend special situations might force the company to not pay dividends. Therefore it is important to look at free cash flow to determine the earning power of the company.
Hi Reg, that’s an important point. Focusing on dividends helps investors focus on the results of the companies they’re actually invested in, rather than the market’s opinion of their value (i.e. share price).
That sort of business-focused and dividend-focused mindset is priceless when the market suffers the sort of rapid decline it’s seen in recent days. I just try to think about the underlying companies and, for the most part, nothing much has changed.
Hi John,
I would say that market correction should serve as an opportunity for a dividend investor to purchase an outstanding dividend stock or increase their interest within a holding.
Part of my attraction to dividend stock is that its a hands-off approach to investing on a day to day basis you ignore the price (your interest should only peak if the price crashes for an opportunity). The most laborious part is developing the knowledge concerning a sector and using that knowledge to determine whether a stock should be included in your holdings.
Once that choice is made you leave that holding alone but follow its performance from the company updates and news on FT or Bloomberg and other reputable sources. The idea is simple to think like an owner if a company is failing strategically, its expenses are going through the roof or in a sector that stinks then the idea is to sell. You may find the stock going up but eventually, it’s going to end in tears. In the late 90s, M&S is the classic example. Between the late 80s to late 90s it made so many catastrophic mistakes all laid out in the annual reports but no one picked it up. The stock price continued going up until the competition exploited all of M&S errors since then the stock has never really recovered.
Based on my comment people may think I am a professional investor but I am merely a beginner. This the hypothesis I have reached based on all those books I have read on business and investing.
Hi Reg, yes I definitely agree. Corrections are an opportunity and investors should be focused primarily on businesses and not short-term share price fluctuations.