This morning we heard that inflation remained at 8.7% during May. Economists had expected a decline to 8.4%. Clearly, this wasn’t good news for the market, or almost anyone.
But here’s a stock that can benefit from this unfortunate situation — Hargreaves Lansdown (LSE:HL).
Rising cash margins
Hargreaves Lansdown is a broker of stocks and shares. Its investment platform — which I use — is the most popular in the UK. The firm has £132bn of assets under administration.
Around 12% of that £132bn of consumers’ assets on the platforms are held in cash. This money, around £13.5bn at the last count, is then lent out to the market by Hargreaves at a higher rate than its customers receive.
As inflation has risen over the last 18 months, and remained sticky over the past two quarters, interest rates have risen. This has allowed Hargreaves to actualise higher cash margins on the customer money it lends to the market.
What we know
The last trading statement didn’t disclose the cash margin. But we know it was sizeable. The company noted that total revenue in Q3 was up 28% year on year, “reflecting a continuation of the increase in net interest margin, which more than offset the impact from the reduction in share dealing volumes and lower average asset values during the period”.
Analysts at the end of 2022 suggested rising rates would add £200m in profits for the year, but the figure could be higher with interest rates set to keep rising beyond expectation this year. As of February’s half-year report, we could see that this income stream had increased 976% year on year.
In short, with Bank of England rates possibly hitting 6% this year, I’m expecting this figure to rise further.
Robust business
While Hargreaves outperformed the market during the pandemic — millions turned to investing with nothing else to do — the post-pandemic world has been a little more challenging for its core business.
That’s not surprising. With the economy reopened, a cost-of-living crisis sees Britons spending more and investing less, so trading volume has fallen. And going forward, the combination of cost inflation and higher mortgages will unlikely help attract new clients.
Recent performance has demonstrated that the business is continuing to grow, just not that quickly. In the last quarter, Hargreaves reported net client growth of 23,000 in the period, taking the total to 1.8m clients.
According to management, customers are trying to make their money work in this high inflation environment. In Q3, net new business of £1.6 billion in the period was up 14% on Q3 FY22.
In the long run, I expect the core business to pick up. But in the short run, I’m happy to keep topping up as cash margins rise. The business has proven to be more robust than many anticipated. And I also like the attractive 5.1% dividend yield.
It’s worth adding that, at 15 times earnings, it hasn’t been much cheaper.
