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Should I Buy ICAP plc?

I’m out shopping for shares again. Should I add ICAP (LSE: IAP) to my wishlist?

If the ICAP fits…

Last time I checked out ICAP, the world’s largest interdealer broker, it was yielding a whopping 8%, the third meatiest dividend on the FTSE 100. This eye-catching income concealed a troubled business, as it often does, with derivatives and securities broking almost destroyed by the financial crisis. I was tempted by ICAP’s low valuation of 9.5 times earnings, but I warned you might have to be patient. That was then, would I buy it today?

ICAP has enjoyed a strong six months since then, up 25% against just 1.5% for the FTSE 100 as a whole. In July, an interim management statement reported an encouraging start to the financial year with a number of positive developments. Volatility in the US Treasuries market, sparked by the threat of QE tapering, created a spike in activity on ICAP’s BrokerTec platform. Group revenue for the quarter rose 2% year-on-year.

But there were disappointments, with challenging conditions for a number of ICAP’s businesses. Commodity trading is down as investment banks cut activity in this area, and low interest rates have reduced demand for ICAP’s risk mitigation services.

Olympic effect

Group chief executive Michael Spencer’s cautious optimism was welcome after a tough 2012, which he pinned on the weak global economy, eurozone crisis, bank deleveraging, regulatory reform, low interest rates and even the London Olympics. The Olympics may be over, but the other issues have yet to be solved.ICAP still throws off lots of cash, and has successfully cut costs to combat weak revenue growth, but this is a competitive area, with few barriers to client switching. The Federal Reserve’s fear of tapering may prove a blow, by reducing trading activity.

The yield isn’t what it was either, having dipped to 5.4%, merely the sixth-highest on the FTSE 100. Nor is it as cheap as it was, trading at 12.4 times earnings. ICAP was more of a bargain last December, I’m afraid. Morgan Stanley and Bank of America Merrill Lynch are in favour, with target prices of £4.18 and £4.50 respectively. Today, you can buy it for £4.08. But you will need fresh reserves of patience, because this stock is still in recovery mode.

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