Should investors be buying these battered spread betting stocks?

Is the worst over for shares in the UK’s two leading spread-betting firms?

| 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.

Shares in the UK’s two leading spread betting firms, IG Group (LSE: IGG) and CMC Markets (LSE: CMCX), have been in the doldrums since the Financial Conduct Authority (FCA) announced proposals to tighten industry regulation back in December. However, following a series of better-than-expected trading updates from the sector in recent months, is it time to pile back in?

Results

IG became the latest spread betting firm to report higher trading revenue today, following Plus500 earlier this month. Net trading revenue rose 7.6% to £491.1m in the year to 31 May, as the group significantly expanded its customer base against the backdrop of unusually low levels of volatility in global financial markets.

The firm attracted 38% more new clients than last year, leading its client base to grow 18% in the year to 185,800. However, as the group’s operating expenses increased 14%, following a step-up in advertising and marketing costs, pre-tax profits grew more modestly, by just 2.8% to £213.7m.

As IG continues to expand internationally and into share-dealing, it’s not just growing in profitability, but reducing its exposure to regulatory risks in the UK retail leveraged OTC market. The share of the group’s revenues coming from UK CFD and spreadbets declined from 52% in 2012, to 45% last year. CMC has an even smaller share, with just 38% of its revenues coming from UK leveraged trades.

Dividends

IG also today said it would pay a final dividend of 22.88p per share, taking its total payout to 32.3p per share. This represents an increase of 2.9% on the previous year, and gives its shares a tempting yield of 5.3%.

CMC has an even higher dividend yield of 6.1%. On the downside though, the company is doing less well in growing its client base and revenue per client has fallen at a much faster rate. In the year to 31 March, its number of active clients rose 5% to 60,082, while revenue per client fell 11% to £2,517. This caused pre-tax profits to fall 9% to £48.5m.

Regulatory risks

It’s important to be cautious with these results as the regulatory crackdown on the industry has yet to happen. It’s difficult to predict the impact and there’s considerable uncertainty over which of the proposed new measures will be adopted and the timing of regulatory decisions.

But don’t forget that regulation can bring benefits too, especially for larger firms that target experienced, long-term clients. As the proposed new rules are intended to improve client outcomes, they could help the industry retain customers for longer. Spread betting firms spend tens of millions chasing new customers because so many of their retail clients lose money — but if fewer clients lose money, then companies may find it easier to keep them.

Stricter regulation also tends to encourage industry consolidation, as the burden of compliance generally hits smaller firms disproportionately. A smaller number of larger firms would likely ease competitive pressures, and potentially boost profits too.

Bottom line

IG and CMC’s focus on the higher end of the market means that they are not the intended targets of the FCA’s proposed regulatory changes. Although, they will likely suffer some collateral damage from regulatory action in the short term, the longer-term impact is unclear. Personally, I reckon the likelihood that these firms will continue to adapt and thrive is high.

Valuations still look cheap, with shares in both firms trading at less than 13 times forward earnings.

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.

Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Abstract bull climbing indicators on stock chart
Investing Articles

Anywhere below £4, BT’s share price looks undervalued to me

BT’s share price has risen considerably over the past year, but this doesn't mean the stock is without any value.…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

Another £5,000 invested in this FTSE 250 high-yield gem could make me £968 a month in dividend income over time!

This high-yield star offers one of the biggest dividend returns in the FTSE 250 and the FTSE 100, especially if…

Read more »

Investing Articles

Can this beaten up and bullet-riddled FTSE growth stock save the day in 2025?

Harvey Jones fell for the glamour of holding Aston Martin shares, but the reality was a shock. Can the FTSE…

Read more »

Elderly father and adult son work in the garden
Investing Articles

Investors can start building towards a £10k second income with just £5 a day!

A fiver a day seems like a small price to pay for a potentially lucrative second income later in life.…

Read more »

Investing Articles

17,648 shares in this under-the-radar Dividend Aristocrat could earn investors £1,500 a year in passive income

With 47 years of consecutive dividend increases, James Halstead might be one of the best passive income shares for UK…

Read more »

Investing Articles

Could this beaten-down FTSE 100 stock outperform the index in 2025?

Investing in precious metals miners has been deeply frustrating over the past few years, but Andrew Mackie believes this is…

Read more »

Investing Articles

No savings at 40? Here’s how late investors could target an £18,100 passive income with UK stocks

Creating a diversified portfolio of UK stocks could be a great way for investors to build long-term wealth, explains Royston…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

The Ashtead share price could soar with proposed US listing! A slam-dunk opportunity to buy?

The Ashstead share price has underperformed its US peers over the past 12 months, but moving its primary listing there…

Read more »