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I’d avoid the Hargreaves Lansdown share price and buy this FTSE 100 dividend stock

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Online broker and fund supermarket Hargreaves Lansdown (LSE: HL) is well known among private investors. I know that many Fool readers are clients.

Shares in this FTSE 100 firm have risen by about 700% since its flotation in 2007. However, Hargreaves’ share price has fallen by about 25% since late September, and the shares are down by 5% at the time of writing.

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Today’s fall came after the company’s half-year results flagged up a big fall in new business. Net inflows fell by 24% to £2.53bn during the second half of 2018, compared to the same period one year earlier.

Despite more modest inflows, Hargreaves’ revenue rose by 9% to £236.4m during the half year. However, pre-tax profit climbed just 4% to £153.4m. As profit rose by less than revenue, we can see that profit margins fell during the period.

My sums indicate that the group’s operating profit margin was 64.5% during the half year, compared to 67.6% during the same period last year. These are still exceptional figures, but I think it’s worth watching in case a downwards trend sets in.

What’s gone wrong?

Nothing much has really gone wrong. The value of Hargreaves’ assets under management fell by 9.4% during the final quarter of last year, which is broadly in line with the FTSE 100. This suggests to me that most investors stayed put, but scaled back new investments.

The problem is that the outlook remains uncertain as we head into the firm’s busy period, just before the end of the tax year. Chief executive Chris Hill says that the combination of Brexit, market volatility and wider geopolitical risks could affect short-term business volumes.

But Mr Hill remains confident about the long-term opportunity for the firm, a view I share.

Yet although this is a high quality business, I think the shares look fully priced on 31 times 2019 forecast earnings, given the uncertain outlook. I’d be looking for an entry point around the 1,500p level. For now, Hargreaves Lansdown will stay on my watch list.

This could be safer than houses

One top-performing FTSE 100 stock I would like to own is property listing website Rightmove (LSE: RMV). This company’s business is almost certainly familiar to you, but you may not realise how outstandingly profitable it is.

During the first six months of 2018, the group generated an operating profit of almost 75%. The profit margin has risen steadily from 69.6% in 2012 to 74.1% over the 12 months to 30 June 2018.

Although Hargreaves enjoys a similar level of profitability, Rightmove’s margins are still rising. You might wonder how much higher they can go. I don’t know the answer to that, but I do know that the firm converts nearly all of its profits into free cash flow, most of which is returned to shareholders through dividends and share buybacks.

A special business?

Unlike Hargreaves, Rightmove doesn’t face the risks of regulatory changes that could cut profit margins. The only long-term threat I can see to the firm is that a rival platform of equal popularity might emerge. This could force Rightmove to lower the fees it charges to estate agents.

The problem with this argument is that the success of Rightmove’s service is directly linked to its 70% market share. No other platform offers such a wide choice of property, so they don’t get as many visitors. For now, I think Rightmove’s future is safe.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown and Rightmove. 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.

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