Why SDR and HL look far too expensive

Schroders plc (LON: SDR) and Hargreaves Lansdown plc (LON: HL) lack value appeal.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Asset management specialist Schroders (LSE: SDR) has released a positive interim management statement. It shows that the company is making good progress with its strategy, with its diversified business model providing a robust performance. However, alongside sector peer Hargreaves Lansdown (LSE: HL), Schroders lacks appeal for value investors.

Schroders’ pre-tax profit (before exceptional items) increased slightly from £453m to £455m in the nine months to 30 September when compared to the same period of the previous year. It was able to generate £2.7bn of net new business and assets under management increased to £375bn. In particular, Schroders made good progress in North America and its diversified business model means that its risk profile is relatively low.

Looking ahead, Schroders is forecast to report a fall in earnings of 3% in the current year, with a return to growth of 8% forecast for next year. This means that Schroders’ bottom line is forecast to be less than 5% higher in 2017 than it was in 2015, which is behind the performance of the wider index. However, Schroders trades on a relatively high rating, with its price-to-earnings (P/E) ratio standing at 16.5.

A P/E ratio of this magnitude indicates that Schroders offers high growth prospects. However, the company’s forecasts indicate that the near term will be tough. As such, it appears as though Schroders is overvalued – especially given the uncertain outlook for the global economy. This means that it offers little margin of safety, which could limit its capital gains and mean there is considerable downside risk.

Overvalued?

It’s a similar story with wealth management peer Hargreaves Lansdown. Like Schroders, it’s a high quality business that’s well diversified and has a track record of strong growth. However, Hargreaves Lansdown trades on a P/E ratio of 29.2, which is exceptionally high given the fact that its bottom line is due to rise by 8% in the current year. In fact, it puts Hargreaves Lansdown on a price-to-earnings growth (PEG) ratio of around 3.6. Alongside Schroders’ PEG ratio of 2.1, this indicates that now isn’t a good time to buy either company.

Furthermore, neither stock offers a high income return. For example, Schroders has a yield of 3.1%, while Hargreaves Lansdown’s yield is 3%. Although Schroders has scope to increase dividends at a faster pace than profit over the medium term, since its dividends are covered 1.9 times by profit, uncertainty in the macroeconomic outlook means that it may take a relatively cautious stance on dividend growth. And with Hargreaves Lansdown’s dividend being covered 1.1 times by profit, it lacks the headroom to deliver rapid dividend growth.

While both companies are high quality and have bright long-term futures, their high valuations mean that the risk/reward ratios on offer lack appeal. Therefore, it may be prudent to look elsewhere at the present time.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »