6.8% dividend yield! Is this the best FTSE 250 bargain stock?

With a bumper dividend, supportive share buybacks, and positive earnings forecasts, what’s to dislike about this FTSE 250 company?

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The numbers coming from FTSE 250 global fintech company IG Group (LSE: IGG) look promising.

And the most tempting figure of all is the 6.8% forward-looking dividend yield for the trading year to May 2024.

What’s more, the firm has a robust multi-year dividend record with no cuts and recent increases. And it didn’t even stop shareholder payments during the pandemic.

Strong cash performance

A strong cash flow performance with a compound annual growth rate running near 28% has backed that stream of dividends. And revenue has been compounding annually at around 13.5%.

Meanwhile, the balance sheet looks robust with a sizeable position of net cash, rather than net debt. And, overall, the financial statistics of the business look as if they are in good shape.

Yet despite the tasty numbers, IG’s share price has been weak. At 695p, it’s around 15% lower than it was in early March. But, I’m guessing much of the weakness arises because the company falls within the wider financial sector. And it might have been dragged down indiscriminately along with the banks.

The directors don’t seem to be worried about the business. They said on 15 March they anticipate revenue and profit before tax will likely be in line with current market expectations. And that’s for the current trading year to 31 May. On top of that, they repeated earlier revenue and profit margin guidance for the medium term.

Meanwhile, City analysts have pencilled in single-digit percentage increases in earnings for this year and next. And they expect the dividend to rise by similar amounts in those periods as well.

But the stock is down about 15% over the past year despite the positive outlook.

However, the directors said in March that active client numbers for the third quarter declined by 5% year on year. And that reflected quieter market conditions in the period. 

But I don’t think that’s much to worry about, at least for the time being. Although I would take notice if the slide in client numbers continues in the next update from the company.

IG wants its clients to win

IG provides online trading platforms for institutional and retail investor/traders. And it’s been in business – and broadly growing – for around 49 years.

The enterprise earns its revenue from clients’ transaction fees. So, it’s the volume of client trading that drives profits. And IG does not make money when its customers lose on their trades.  

IG reckons, then, that the more its clients succeed with their trading, the more the business succeeds. And that’s because when the customers are trading well they’re more likely to continue.

Meanwhile, IG aims to help its users succeed by providing access to an educational ecosystem.

However, there is a clear risk for shareholders here if client numbers continue to decline. And that’s because revenue and profits will likely follow, along with the dividend.

Nevertheless, the company seems flush with cash right now. And it’s even engaged in a multi-million-pound share buyback programme. 

Given the tempting valuation numbers, those buybacks look well timed. And they may help to support the share price.

Overall, I think IG is a serious contender for being labelled the FTSE 250’s best bargain stock!

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.

Kevin Godbold has no position in any of the 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.

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