Hargreaves Lansdown (LSE:HL) shares are down 43% over the past year. A considerable proportion of this drop came in February after the firm reported a 20% fall in profit before tax for the six months ended December. However, I’m backing this stock to grow in the future and I think now is a good time to buy.
The Bristol-based firm sells funds and shares and related products to retail investors. The company also runs a market-leading investment platform and is a constituent of the FTSE 100 Index.
What’s behind the fall?
The Hargreaves Lansdown share price dropped by around a quarter in February as the firm reported a 20% fall in profit before tax for the six months to December. The company had benefited from the lockdown trading boom as thousands of amateur investors started chasing profits through online platforms like Hargreaves Lansdown’s. But it claimed that 2020 was a “unique period” for the company and one that was unlikely to be repeated. The end of the year saw events like ‘Vaccine Monday’ that drove record-breaking stockbroking volumes.
However, the company said profits fell during a calmer 2021. Its report stated that “calmer markets…led to more normalised share trading levels”. In other words, workers returning to offices found themselves with less time to trade shares and invest their savings, while some share prices also got more expensive. This resulted in lower profits for Hargreaves Lansdown. However, the firm noted that trading levels were still higher than before the pandemic.
Returns
The company’s dividend yield certainly was never world-beating, but following the sustained fall in the share price, it’s starting to look pretty good. If I buy today, I can expect a respectable 4.1% yield. Hargreaves could have a stronger dividend coverage ratio, but I don’t see it having any troubles paying its shareholders.
Where’s the share price going?
For me, there’s a lot of upside potential with this stock. The investment platform is the market leader in the UK. It’s also very profitable and saw sizeable increases in revenue in each of the five years to 2021.
Despite the recent blip, there are many reasons to be confident about Hargreaves Lansdown’s future. The pandemic saw a new cohort of investors — many of them young — start investing. And while there has been a slowdown in terms of trades since the height of the pandemic, thousands of new people have been introduced to online share buying. I think Hargreaves is in a good position to benefit from this. As a user of its platform, I’m very content with its service and I find the platform preferable to others on the market.
Moreover, the Bristol-based firm recently launched a plan to upgrade its technology and provide new forms of insight for clients. The company intends to spend an extra £175m over the next five years. While the changes seem logical, we may not see the impact for some years. If the changes don’t work, it could make the firm less profitable than it is today.
It’s worth noting that it’s a competitive market and Hargreaves could lose some of its market share to newcomers. Equally, the cost of living crisis may leave investors with less cash to invest.
Despite this, I’m bullish on Hargreaves Lansdown. I’ve already bought shares in the firm and will purchase more.
