Neil Woodford’s epic fall from grace hasn’t been great news for investment platform provider Hargreaves Lansdown (LSE: HL). Indeed, the FTSE 100 constituent has come in for heavy critcism after continuing to promote the now-collapsed Equity Income Fund, right up to the point investors were prevented from taking their money out.
Is this bad publicity enough to make its FTSE 250 rival AJ Bell (LSE: AJB) a better buy? Today’s year-end trading update from the latter certainly won’t damage its investment case.
Customer numbers up
The number of customers served by the business rose a very healthy 17% to just over 232,000 in the year to the end of September, with a little under 35,000 more people using its platform service.
Total assets under administration came in at £52.3bn — 13% higher than a year earlier. As the company stated, this was also far better than the 2% reduction achieved by FTSE All Share — the index comprising the FTSE 100, FTSE 250, and FTSE Small Cap indices. Platform assets under administration rose 16% to £44.9bn, with underlying inflows of £5.4bn.
CEO Andy Bell — who still owns a sizeable chunk of the company — reflected that today’s numbers helped to show just how resilient the business model was, adding that savers looked for “established, trustworthy businesses” in the industry during times of political unrest.
So, which one’s a better buy?
It’s a tough one. Both companies are ideally placed to benefit from the growing numbers of people wanting to have more control over their money. Both also generate sky-high returns on the capital they employ to grow their businesses.
And while Hargreaves has long been praised for its customer service, I’ve not come across evidence to say AJ Bell is lacking in this area either. Anecdotally, as a client of both, I’ve had no complaints.
There are a few ways of separating the companies. Although dividends are unlikely to be of much concern to investors in either business, Hargreaves yields a forecast 2.7%, according to analyst estimates.
Befitting its growth credentials, AJ Bell yields just 1.6%. As you would expect from its top-tier status, Hargreaves is also the clear market leader (it had 1.26m investors on its books and £101.8bn in assets under administration by the end of last month).
On the other hand, AJ Bell’s smaller size arguably gives it more potential to grow. It also benefits from having no association with the aformentioned Woodford saga. Hargreaves, by contrast, could be subject to legal action from investors if it can be proven the broker was aware of issues surrounding the Equity Income Fund while continuing to back it.
Regardless of all this, what’s clear is the valuations of both companies remain high. Before markets opened this morning, Bell’s stock changed hands on 40 times forecast earnings (which might go some way to explaining why the share price isn’t sprinting away this morning). Following a period of weakness, Hargreaves has a lower but still-pretty-demanding forward price-to-earnings (P/E) ratio of 30.
Personally, I think both companies are worthy of investment, but only at the right price. For now, I’m content to do nothing and simply stick with my (small) holding in AJ Bell.
Should markets head south in 2020 as a result of fears surrounding global growth, Brexit, the US/China trade war, or some ‘unknown unknown’, that’s the time I’ll consider acting.
