Is Hargreaves Lansdown The Ultimate Retirement Share?

Published in Company Comment on 5 September 2012

Will shares in Hargreaves Lansdown help you build a FTSE-beating retirement fund?

The last five years have been tough for those in retirement. Portfolio valuations have been hammered and annuity rates have plunged. There's no sign of things improving anytime soon, either, as the eurozone and the UK economy look set to muddle through at best for some years to come.

A great way of protecting yourself from the downturn, however, is by building your retirement fund with shares of large, well-run companies that should grow their earnings steadily over the coming decades. Over time, such investments ought to result in rising dividends and inflation-beating capital growth.

In this series, I'm tracking down the UK large-caps that have the potential to beat the FTSE 100 (UKX) over the long term and support a lower-risk income-generating retirement fund (you can see the companies I've covered so far on this page).

Today, I'm going to take a look at Hargreaves Lansdown (LSE: HL), one of the largest fund supermarket and investment management services in the UK and a company that has proved to be an excellent investment in its own right.

Setting an example

Hargreaves Lansdown only floated on the stock market in 2007 but has outperformed the FTSE 100 since then, as these figures show:

Total Return20072008200920102011Trailing 5 yr avg.
Hargreaves Lansdownn/a%-7.9%88.6%102.7%-23.3%26.2%
FTSE 1007.4%-28.3%27.3%12.6%-2.2%1.5%

Source: Morningstar

(Total return includes both changes to the share price and reinvested dividends. These two ingredients combined are what make it possible for equity portfolios to regularly outperform cash and bonds over the long term.)

Anyone investing in Hargreaves Lansdown shares shortly after the company's flotation five years ago will now be sitting on a total return of 26.2% -- a considerable improvement over the 1.5% managed by the FTSE 100 (including dividends) over the same period. The question for today's retirement investors is whether Hargreaves Lansdown can maintain its strong performance and profitability over the long term.

What's the score?

To help me pinpoint suitable investments, I like to score companies on key financial metrics that highlight the characteristics I look for in a retirement share. Let's see how Hargreaves Lansdown shapes up:

ItemValue
Year founded1981
Market cap£3bn
Net cash£122m
Dividend Yield2.5%
5 year average financials
Operating margin52.1%
Interest covern/a
EPS growth83%
Dividend growth92.5%
Dividend cover2.7x

Source: Morningstar, Digital Look, Hargreaves Lansdown

Here's how I've scored Hargreaves Lansdown on each of these criteria:

CriteriaCommentScore
LongevityStill a relative youngster.3/5
Performance vs. FTSENo complaints so far, but it's still early days.4/5
Financial strengthNet cash and very high profit margins provide a margin of safety.5/5
EPS growthVery strong, albeit over a relatively short (reported) period.4/5
Dividend growthExcellent growth rate highlights cash generative nature of business.4/5
Total: 20/25

A score of 20/25 is impressive and suggests that Hargreaves Lansdown could be a strong candidate for a retirement fund portfolio.

Despite this, there are a few potential risks for retirement investors to consider. Companies like Hargreaves Lansdown make money from fund sales and from trading activity. Although it has grown aggressively since it listed on the LSE in 2007, Hargreaves has benefited from a period of financial turmoil that has attracted numerous new investors and generated a lot of short-term activity. These conditions could reverse in future years, reducing its income.

Hargreaves is also an expensive share, currently trading at 26 times earnings and close to its all-time high. I would be tempted to wait for a period of weakness before buying in, but that might be a long time coming given the quality of the company's 2011/12 results. Published today, they revealed that pre-tax profits rose by 21% last year, while customer account numbers were up 11% and assets under administration grew by 7%.

Expert selections

Doing your own research is important, but another good way of identifying great dividend-paying shares is to study the choices of successful professional investors. One of the most successful income investors currently working in the City is fund manager Neil Woodford, who manages more money for private investors than any other City manager. Neil Woodford's dividend stock picks outperformed the wider index by a staggering 305% in the 15 years to 31 December 2011.

You can learn about Neil Woodford's top holdings and how he generates such fantastic profits in this free Motley Fool report. Many of Mr Woodford's choices look like excellent retirement shares to me and the report explains how he chose some of his biggest holdings.

This report is completely free and I strongly recommend you download"8 Shares Held By Britain's Super Investor" today, as it is available for a limited time only.

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Further investment opportunities:

> Roland does not own shares in Hargreaves Lansdown.  The Motley Fool owns shares in Hargreaves Lansdown.

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

jongleur100 05 Sep 2012 , 6:48pm

The high P/E plus the 5 year 204% sp increase and the fact that the sp is at its all-time peak tells me to wait for a lower entry point. It's admittedly very impressive double digit EPS growth, year on year, but nothing goes up for ever.
HL's moat is that its investors would be hammered with massive costs if they moved their shares/funds to another provider, and if they're in an ISA it'd be impossible to shift £300K elsewhere and keep the tax-free benefit.
If they were to introduce a FTSE All share DRIP scheme (for their customers, I mean) that would give them a killer advantage. At present dividends cost their full dealing charge to reinvest. Nobody wants to pay £12 to reinvest £250 at a time.

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