IG Group: When Trading Pays Dividends

Monday, Nov 19 2012 by
IG Group When Trading Pays Dividends

Whilst the services provided by IG Group are probably an anathema to a long term dividend investor, its shares nevertheless merit some attention for those seeking income and growth.

IG Group Holdings plc (LSE: IGG) is a leading provider of financial spread betting and contracts for difference (CFDs). The company was re-floated on the London Stock Exchange in May 2005 after being taken private by the venture capitalists CVC Capital Partners only two years prior. The business was however established in 1974 as the UK’s first financial spread betting company, initially under the name ‘Investors Gold’ Index, as its first service was to allow people to trade the price of gold as an index. Several years later they offered spread betting on the FT30 index although it took until 1995 to become the first UK company to allow spread betting on individual company shares. In 1998, with the advent of the internet, their online dealing platform was launched.

Today IG Group is a member of the FTSE250 with a market capitalisation of £1.5bn. Since the re-flotation in May 2005, the company has seen an impressive growth in revenues, earnings and dividends as seen from the chart below.

Over the 7 year period from 2006 to 2012, net trading revenues advanced at a compounded annual growth rate of 27%, with earnings and dividends per share at a CAGR of 23% and 26% respectively. (Note: ‘net trading revenues’ have been used for comparability – as from the 2011 accounts statutory revenues were grossed up for brokers’ commissions).

The acquisition that went wrong

The obvious anomaly to question in the above chart is the basic loss per share that was reported in 2011.

The reported loss in 2011 resulted from a total charge for exceptional items of some £153m (pre-tax) which largely comprised a write off of the whole of the goodwill in connection with the group’s Japanese business. ‘Goodwill’ is an intangible asset created in the balance sheet in order to account for the difference between the amount paid for a business and its net asset value and accounting standards force companies to constantly review the amount of this goodwill to ensure that it remains “recoverable” i.e. its value is supported by the expected future discounted cash flows from that particular business unit. So whilst a write down of goodwill is sometimes considered fairly…

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IG Group Holdings plc is a United Kingdom-based company, which is engaged in online trading. The Company provides contracts for difference (CFDs) in over 17 countries globally. The Company's segments include UK, Australia, Europe and Rest of World. The UK segment consists of its operations in the United Kingdom and Ireland, and derives its revenue from financial spread bets, CFDs, binary options and execution only stockbroking. The Australian segment derives its revenue from CFDs and binary options. The Europe segment consists of its operations in France, Germany, Italy, Luxembourg, the Netherlands, Norway, Spain, Sweden and Switzerland, and derives its revenue from CFDs, binary options and execution only stockbroking. The Rest of World segment consists of its operations in Japan, South Africa, Singapore, the United States, the United Arab Emirates and Dubai, and derives revenue from the operation of a regulated futures and options exchange, as well as CFDs and binary options. more »

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6 Comments on this Article show/hide all

fra1961 28th Nov '12 1 of 6

The author talks his own book.

Easy thing to do .,

PI's do it all the time but this is a professional.

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Edward Croft 28th Nov '12 2 of 6

An interesting point about IG Index is that it's currently qualifying for 1 in 6 of our screening models (i.e. 10) http://www.stockopedia.com/hotlists/

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toddwenning 4th Dec '12 3 of 6

Nice overview of IGG, MI.

A few more positives/negatives to keep in mind:

* IG has already won over most of the active traders in its major markets -- convincing the marginal would-be punter to spread-bet has become more challenging and will require higher marketing & advertising spend. Lower margins are therefore possible. IG could look to expand into additional countries, but as we saw with Japan, that can be a high risk bet.

* When I spoke with IG's CEO in 2011, he said that technology was the company's main competitive advantage. That's true in a sense and the company outspends its nearest competitors many times over on tech development, but technology spending is only a worthwhile investment if leads to something else -- i.e. enhances customer switching costs (think Apple) or builds a network effect (think eBay, Facebook). Otherwise a kid in his garage can be your next competitor. It seems IG's technology spend (on mobile, tablet, better platforms, etc.) is mainly designed to enhance switching costs that make it more difficult for customers to change platforms.

* Regulation cuts both ways. Though it ultimately hurt them in Japan, the added regulatory costs also keep start-ups at bay. That said, I think regulation is a bigger risk than a benefit.

* IG might be a slight hedge against market volatility since trading picks up when the markets become turbulent. In my experience following IG, it seems the market under-appreciates this aspect in the short-term when markets turn ugly, but comes around when the company reports better results.

Hope this helps.


(long IGG)

Blog: Clear Eyes Investing
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Miserly Investor 4th Dec '12 4 of 6

In reply to post #69657


Thanks for your comments - all points are well made.


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Richard Goodwin 29th Dec '12 5 of 6

Surely the main issue for IGG is potential regulatory uncertainty, especially in various European states? There is a section about it in the most reent Annual Report http://www.iggroup.com/content/files/annual_report_11.pdf (page 23)

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Miserly Investor 29th Dec '12 6 of 6

Hi Richard,

Agreed. Regulatory changes are one of the biggest business risks for IGG - this was mentioned in the article under the section about the Japanese acquisition where it hit them quite badly.


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