Profit growth of 10pc and a return of special dividends: hold Hargreaves Lansdown

Britain’s biggest investment shop is one of three Questor holdings to have posted solid results in recent weeks

WE REPORT today on three holdings that have announced results in recent weeks. Two of them have made money for readers since our original tip.

Update: Hargreaves Lansdown

Britain’s biggest investment shop announced annual results earlier this month. It attracted a net £7.6bn of new money from clients, taking total assets under its care to £91.6bn, compared with £79.2bn the previous year. Revenues net of “loyalty bonuses” rose by 16pc to £447.5m and profits before tax increased by 10pc to £292.4m. The company also reinstated its special dividend at 7.8p, dropped last year to boost capital; the total payment rose by 38pc to 40p. Hargreaves said it had “a high conversion rate of operating profits to cash” and its net cash balance was £343.5m at the year to the end of June, compared with £255.9m a year previously.

The firm’s reputation for excellent service makes it an obvious choice for customers who look beyond paying the lowest price, and its financial strength is likely to appeal to those worried by the lack of cast-iron protection for investors discussed here four weeks ago in connection with the collapse of Beaufort Securities. Nick Train, one of Britain’s most respected investors, owns Hargreaves Lansdown shares among the top 10 holdings of his Finsbury Growth & Income trust. His belief in the firm – he once called it “a formidable machine in terms of its commercial success and its ability to generate cash” – prompted Questor’s original tip in January last year, since when the shares have risen by 63.5pc. Hold.

Update: HSBC

Progress has been less spectacular at HSBC, which announced interim results on Aug 6. Since our “hold” advice in February 2017, the shares have gained 4pc.

Among the prominent fund managers to hold the stock then was Richard Buxton, who runs the Old Mutual UK Alpha fund. HSBC remains his second largest holding.

“The investment case is much the same as last year,” said Rob James, a banking analyst at Old Mutual. “We said then that the bank would benefit significantly from rising interest rates.

Rates have indeed gone up, although things have not played out quite as quickly as we expected.”

He said America’s benchmark cost of borrowing was “the big one” for HSBC but also noted favourable developments in Hong Kong.

“There had been a disconnect between rates in Hong Kong – the ‘Hibor’ – and in America but the former have now risen. This helps HSBC in its operations there.”

The bank’s shares yield about 5.5pc and James said there was “no chance” of a dividend cut.

“It will probably be flat this year,” he said. “The market expects no change the following year either but I think we could see a dividend increase then as profitability improves.” A sure hold for income investors.

Update: Polypipe

Polypipe, the maker of plastic pipes, announced interim results earlier this month. Sales were flat against the same period last year, although underlying operating profits fell by 4.2pc to £36.3m.

“This performance can be considered resilient against tough conditions in some of its markets and very adverse weather in February and March,” said Gaspar Ariño of Montanaro Asset Management, which holds the shares in its UK Income fund.

“The market treats this business as another highly cyclical construction company ahead of Brexit without the ability to grow, hence the low priceto-earnings ratio of 13 for 2018. But I believe Polypipe is a predictably good business well-positioned to continue delivering organic growth that should drop to the bottom line.”

He added: “Growth will also be supplemented by bolt-on acquisitions, a point unappreciated by the market, and the company has the ability to increase prices to offset input cost inflation. It is very cash generative, the balance sheet is solid and the yield is more than 3pc.” The shares are 8.2pc below where we tipped them in March but Polypipe’s qualities and valuation make them a strong hold.

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