Should I Buy ICAP?

Published in Company Comment on 18 December 2012

Harvey Jones sizes up ICAP (LSE: IAP).

It's time to go shopping for shares again, but where to start? There are loads of great stocks to choose from, and I've got my wallet out. So here's the question I'm asking right now. Should I buy ICAP (LSE: IAP)?

A bit of a divi

If you like big fat juicy dividends, you will have already checked out ICAP, the world's largest inter-dealer broker. This stock currently yields around 8%, beaten only by Resolution and RSA Insurance in the FTSE 100 (UKX). But meaty dividends often come with a fair bit of gristle, leaving me in two minds. Should I buy ICAP?

Drop it!

Investment legend Warren Buffett famously called derivatives "financial weapons of mass destruction", and ICAP has found itself in the firing line. As a global wholesale broking business in the derivatives, securities and money markets, the financial crisis has shot this stock down. It tanked in the autumn of 2008, as you might expect, and is tanking today. Over the last two years, it has fallen from £5.70 to just £3.90, a drop of 46%. Where did it all go wrong?


ICAP has suffered a series of profits downgrades, and is struggling to convince the market that future trading levels will bounce back. Latest half-year results, published in mid-November, gave little grounds for hope, with trading falling across all asset classes and regions. Group revenue was down 14% to £746 million, profit before tax fell 26% to £137 million and adjusted earnings per share crashed 21% to 15.4p. These results prompted chief executive officer Michael Spencer to bemoan one of the toughest periods in his 36-year business career, which he blamed on economic weakness, the continuing eurozone crisis, bank recapitalisation and deleveraging, uncertainty over regulatory reform, quantitative easing, low interest rates and the London Olympics. That's quite a list of troubles.

Austerity drive

Spencer's response has been to batten down the hatches, cut costs and wait for the storm clouds to lift. ICAP has had some success, and is on course to make cost savings on more than £50 million in the current financial year. If volumes remain at today's depressed levels, pre-tax profits for the 12 months to next March should range between £307 million and £346 million, roughly meeting analyst expectations. It also felt confident to raise its dividend by 10%, to 6.6p.

A good deal?

I'm always wary about investing in out-of-favour sectors. As HMV has discovered, when the world turns against you, there is little you can do about it. But I wouldn't put ICAP in that bracket. Like Spencer himself, I'm confident the mood will slowly move back in favour of this sector. Maybe I'm caught up in the end-of-year bullishness, but now could be a good time to buy this company while it's trading at 9.4 times earnings for March 2013. It depends on how patient you are. You might have to wait several years for your bet to pay off but, in the meantime, that dividend is yours to keep.

Bullet proof

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> Harvey doesn't own any shares mentioned in this article.

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