History Hargreaves Lansdown PLC - Essay Example

?2. Brief Company History Hargreaves Lansdown PLC was founded in 1981 by Peter Hargreaves and Stephen Lansdown to provide personal advice to on unit trust and tax planning matters. In 1986, the company launched discretionary management service for clients but due to disasters like Chernobyl and Bing Bang the market did not perform as expected. The summer months of 1987 witnessed sudden interest in the stock markets when Personal Equity Plans (PEP); however the stock market crashed in October, 1987. [1] In 1991, the company expanded and Hargreaves Lansdown Stockbrokers was formed. Increased demand lead to formation of HL Fund Managers to provide a managed portfolio of investments trusts. Hargreaves Lansdown offered preferential cash account facilities to its clients in partnership with Bank of Scotland in the year 1996. In the same year, Hargreaves Lansdown introduced PEP discount directory and also the prototype of consolidated application form which could have accepted by different groups. The year 1999, saw another service launched by the company called, Hargreaves Lansdown Pensions Direct followed by the launch of the online share dealing services with lowest tariffs as low as GBP 9.95. [1] With the introduction of Annuity Supermarket, people could easily compare and shop around for the best annuity rate available. Investment Saving Account (ISA) was soaring as the high volumes challenged the investment industry as demand for technology investments seemed insatiable. With stock markets in turmoil and property markets saturated in 2002, investors were reluctant to invest fresh money during this period. The financial division was restructured and re-launched in 2003 as Hargreaves Lansdown Financial Practitioners. [1] In the year 2007, Hargreaves Lansdown listed on the FTSE with 25% shareholding held by public. Vantage is the company’s flagship service, which garnered GBP 7.4 billion of assets in 2007. [2] 4. A review and analysis of the financial service sector The financial sector accounted for roughly about 10% of United Kingdom’s GDP in 2009 [3]. The financial sector includes banking, insurance, fund management, securities trading and alternative investments. It employs close to a million people and makes a significant contribution to the country’s balance of payments and to tax revenues. London was once known as the financial centre of the world, has been severly affected by the global financial crisis which forced a restructuring of the entire UK financial system. The scale and origin of the financial crisis still is not officially verified but excessive leverage and highly complex financial instruments have played a major part [3]. Conventional assets under management include pension, insurance and mutual funds (also called unit trusts or collective investment schemes) that invest in stocks, bonds and money-market instruments. UK pension assets accounted for 9% of the world total in 2009, and have one of the world's highest ratios of pension assets to GDP. The combination of falling birth rates, longer life expectancies and ageing baby boomer generation has led to well documented pressure on state pension provision. Insurance assets under management in the UK are second only to the US. UK mutual fund assets are around ?440bn in 2009, the highest after the US, France and Japan. Alternative assets under management include sovereign wealth funds (SWFs), private equity (PE) funds, hedge funds, commodity funds and exchange-traded funds (ETFs). [3] A policy-driven rally in asset prices has helped to increase confidence and led to a recovery to some extent and also have increased the risk appetite, but fund inflows remain slow, mainly due to weak economy of most developed OECD member countries and unclear outlook for financial markets, some of which remain almost entirely dependent on state support to function. The fund management industry has been less affected by the financial recession than the banking sector, but the weak economic outlook in medium-term and high chances of tighter regulation (particularly of the alternative asset management sector) will lead to more cautious investment strategies over the coming years.[3] The prominent UK financial companies have outsourced the management of their respective pension plans to specialised fund managers. It is estimated that the public sector's share of occupational and personal pension wealth was double its share of total earnings in the economy. Estimates of the cost of unfunded public-sector pension obligations have been put at around ?1 trillion - 1.2 trillion equivalent to some 80% of GDP. This signifies high risk to the country as whole until unless the entire system is transparent enough to withstand any financial turmoil. The hedge fund industry bounced back sharply in 2009 after suffering a major retrenchment after the credit crunch. Improved performance is nevertheless attracting investors back to the sector. [3] The UK fund management sector has a strong international orientation and is fairly concentrated, with the largest five fund managers accounting for about one-third of total funds under management, and the top ten for 40%. Over the past five years, multi manager products have become a more prominent feature of the collective instruments funds market. In future, the financial services industry has to face challenges such as tougher regulatory environment, high taxes and global competition especially from that of the emerging economies that have a more strong financial foundation and are less leverage because of the protectionist reforms. Financial products will become more transparent; with special purpose vehicles created will have to fight to prove its worth and short term performance will be less desired with more emphasis on strong fundamental growth. 6. Analysis of Hargreaves Lansdown’s share price performance and stock market indices Since its inception in 2007, HL has always moved up and now it’s trading at an all-time high. HL was valued GBP 800 million when it was floated in London Stock Exchange and the current market value (28th April, 2011) stands at GBP 3,052.24, which is almost 4 times the inception market value [10]. Figure 1: Share price movement of Hargreaves Lansdown PLC in comparison to FTSE 100 [4] Figure 1 above compares Hargreaves Lansdown’s (HL) share price movement between financial year 2008 and 2011 to the movement of the index i.e. FTSE 100 over the same period. The movement was in tandem until the first quarter of 2009. The share price of HL started to drift away majorly from the start of 2010 from that of FTSE 100. Hence, it is pretty clear HL has out-performed FTSE 100 significantly. If $100 were invested in FTSE 100 it would have given a return of 0.22% i.e. only $100.22. Similarly if $100 were invested in HL, it would have given a return of 271.44% over a period of 3 years. The investor would have turned $100 into $371.44 at the end of 28th April, 2011. This signifies that the investors have greater confidence in the company. Since the recession in 2007-2008 there has been a consistent development in the stock price of HL. Similarly, Figure 2 below compares HL’s to some of its competitors. HL’s shares have also performed well significantly when compared to that of their competitors. While the competitors, namely, F&C Asset Management PLC (FCAM) has given negative returns over the period in consideration, Rathbon Brothers PLC (RAT) has managed to stay on the positive side of the graph providing 13.33 % return over 2007-2011 period in consideration. HL has performed exceptionally well both within the index as well as with that of competitors. However, the future performances cannot be built on the past results. In other words, because of market efficiency, the future share prices cannot be predicted and it could be that the share price of HL may just start drifting downwards and share price of its competitors' starts shooting up. Figure 2: Share price movement comparison [4] Table 1: Comparison of Hargeaves Lansdown PLC with the Industry and Sector [5] As of 15th April 2011 Hargreaves Lansdown PLC Industry Sector S&P 500 Beta 0.71 1.54 1.06 1 P/E ratio 39.03 20.16 15.48 19.68 Dividend Yield 0.83% 1.43% 1.64% 2.26% Payout Ratio (TTM) 42.44% 26.71% 15.01% 25.98% Dividend per share - 5yr Avg 0.05 1.92 2.58 1.99 Table 1 above compares HL’s performance with that of the industry and the sector. It also compares the performance with that of S&P 500. The results again strengthen the share price chart movement argument that we have specified about previously. The beta is defined as a measure of the volatility, or systematic risk, of a stock in comparison to the market as a whole [6]. In this case HL’s shares are less volatile when compared to the market as it is less than 1 i.e. 0.71. In other words, if the relevant index moves for example 10 points either ways, the stock price of HL will move to the extent of only 7.1 points either ways respectively. The beta of the industry stands at 1.54 which suggests that the industry as a whole is very susceptive to the movement in the stock market. The Price-Earnings ratio (P/E) of HL is pretty high when compared to that of the industry and the sector. High P/E ratio suggests that the investors are expecting higher earnings growth in the future compared to the companies with a lower P/E [7]. Since HL’s P/E is higher than the industry average the investors are expecting higher returns. The flip side of high P/E is that it also suggests that the stock might be overvalued and is due for a price correction. A company doing well and generating profits will usually be a regular dividend payer and to measure the effectiveness dividend yield is very good parameter to evaluate the company. Dividend yield shows how much the company pays out each year in dividend, relative to its share price [8]. Hence higher the ratio, the better it is. In case of HL the dividend yield is lower than its industry and also sector. It might suggest that the company is not giving enough returns but there might also be the case wherein the management of the company is reinvesting the profit generated in the company. This brings in the concept of payout ratio. Payout ratio suggests the reinvestment rate or the retention ratio the management has adopted. Higher the ratio the lesser is the retention ratio and vice versa. The payout ratio of HL is higher than the industry average and far ahead than the sector average. This suggests that the company is paying dividends but the dividend yield is low. This might be the case because the market price of the share is higher and hence does not show the true value of the company. It would be safe to that the company is over valued at current market price. Hargreaves Lansdown PLC F&C Asset Management PLC Rathbone Brothers PLC Year 2010 2009 2008 2007 2010 2009 2008 2007 2010 2009 2008 2007 Payout Ratio 85% 89% 87% 0% 91% 188% 56% 169% 89% 92% 95% 47% Diluted Earnings per share 13.10 11.10 9.00 6.40 -3.31 3.19 -10.64 3.54 49.35 45.53 44.09 86.46 Dividend /share (in pence) 11.88 10.10 7.81 - 3.00 6.00 6.00 6.00 44.00 42.00 42.00 41.00 Table 2: Comparison of HL with the competitors 9 [4] HL has been outperforming its competitors as well. HL has a consistently increasing Earning per share (EPS) over the last four years. EPS is the income generated by the income attached to each share. We have taken diluted EPS into consideration because it factors in the worst possible situation for the common stockholders. We have not try to compare the EPS of HL with that of its competitors on a relative basis for the mere reason being different capital structures. All Annual reports of all these three companies suggest they have number of shares held are different. This could be one reason why Rathbone Brothers PLC has such a high diluted EPS. They have the least number of shareholders when compared to other two companies in context. HL’s steady increase in diluted EPS shows a lot of promise because the reason behind is that of the numerator effect i.e. the earnings which has been increased to approx. 40% in 2010. HL was listed in the year 2007; hence there is no dividend data. Dividend declared per share has been increasing ever since, up from 7.81 in 2008 to 11.88 in 2010. The payout ratio in the case of F&C Asset Management PLC is more than 100%, for the year 2009 and 2007, is mainly because of negative earnings for both these years. HL does not have such a situation as they have a comfortable profitability which the management, believes in distributing it more than retaining it for reinvestment purpose. 7. Evaluation of potential future performance Investor confidence, structure of the financial system and the identity of so called robust economies all had taken a beating because of the recession. With the world coming out of recession and developed economies showing signs of fundamental growth, exciting times lie ahead for the company. Average assets under management remain higher than they were in March 2009 at the scheduled market bottom, but remain below peak levels as well. Firms with stronger performance, solid management reputations, and a wide range of investor option will see best flows amongst the competition. HL do not have capital and profitability problem therefore they don’t have to divest their asset management and trust units like the large financial firms who are planning to do divest. The company might look to concentrate and consolidate on its international expansion. The company has been pioneers in starting innovative products since inception. The good thing that the company has been doing is that, they are very client centric as a result the exposure levels and transparency are key factors maintained to protect client interests. This factor of theirs will act as a catalyst in all there successful dealings with clients. The accounting rule changes for corporate pension accounts will result in opportunities for new institutional accounts. Pension funds have always been a strong segment for HL, therefore new accounts openings will benefit HL in future. The average age of people in UK are expected to increase by 64% in the next decade which will only further add strength to the demand of pension fund accounts. Investors are expected to favor wrap accounts and target-date retirement funds. However, mutual fund growth could be partly offset by reduced asset management fees, due to the growing investor demand for index and exchange-traded fund products, which carry lower management fees [9]. Bibliography: [1] History, available: http://www.h-l.co.uk/about-us/history [accessed 29th April 2011] [2] Prospectus, available: http://research.thomsonib.com/gaportal/ga.asp [accessed 29th April 2011] [3] Industry Report, available: http://viewswire.eiu.com/index.asp?layout=ib3Article&article_id=1107637695&country_id=1460000146&pubtypeid=1132462498&industry_id=&category_id=775133077 [accessed 29th April 2011] [4] Share price movement, Available: http://www.google.com/finance?q=LON%3AHL accessed 29th April 2011] [5] Annual reports – HL, FCAM and RAT [accessed 29th April 2011] [6] Definition- Beta, Available: http://www.investopedia.com/terms/b/beta.asp [accessed 29th April 2011] [7] Definition- PE ratio, Available: http://www.investopedia.com/terms/p/price-earningsratio.asp [accessed 29th April 2011] [8] Definition – Price Earning ratio, Available: http://www.business-standard.com/india/news/dividend-booster-for-steady-returns/434037/ [accessed 29th April 2011] [9] Outlook 2011, Available: http://djce.dowjones.com/djce/at/default.aspx [accessed 29th April 2011] [10] Market capitalization, Available: http://uk.reuters.com/business/quotes/overview?symbol=HRGV.L [accessed 29th April 2011] Read More