Hargreaves Lansdown (LSE: HL.) shares have experienced a huge fall in recent years. As a result, they now trade at a low valuation and offer a high dividend yield.
Does this make them one of the FTSE 100’s best buys? Let’s discuss.
An industry leader
Looking at Hargreaves Lansdown today, there’s a lot to like about the business from an investment perspective, to my mind.
For a start, the company is a leader in its field. Currently, it has:
- 1.8m clients
- £134bn in assets under administration
- 1.2m ISAs
- 520k SIPPs
- A 42% share of the UK retail investment platform market
This dominant market position gives the company a number of strategic advantages.
Significant growth potential
Secondly, it has plenty of growth potential. Hargreaves Lansdown generates a large chunk of its income from account fees. The larger your account, the more fees you pay.
This means that as people save and invest more in the years and ahead, and markets rise over time, its revenues and profits should steadily tick higher.
Very profitable
It’s also a very profitable business. Over the last five years, return on capital has averaged 62%. That level of return puts it in the top few FTSE 100 companies in terms of profitability.
In the long run, companies with high returns on capital tend to be good investments as they can compound their earnings at a high rate and grow much bigger over time.
Big dividend
As for the dividend, it’s certainly attractive. For the year ended 30 June, analysts expect a total dividend payout of 41.3p per share (this is just a forecast).
At today’s share price, that equates to a yield of 5.1%. That’s well above the average FTSE 100 yield.
| FY2022 | FY2021 | FY2020 | FY2019 | FY2018 | FY2017 | FY2016 | |
| Ordinary dividend | 39.7p | 38.5p | 37.5p | 33.7p | 32.2p | 29.0p | 24.1p |
| Special dividend | 0.0p | 12.0p | 17.4p | 8.3p | 7.8p | 0.0p | 9.9p |
And Hargreaves has a good track record when it comes to lifting its payout as the table above shows.
Low valuation
Finally, the stock’s valuation is quite low. Currently, the consensus earnings forecast for this financial year is 62.5p.
That puts the stock on a forward-looking price-to-earnings (P/E) ratio of about 12.9, which is below the lead index average.
Risks
Of course, the stock isn’t perfect. And there are a couple of issues here that are worth highlighting.
One is rising competition. In the last few years, new players such as Trading212 and Freetrade have sprung up in the retail investment space.
Hargreaves Lansdown may have to lower its fees to compete with the companies. This could hit profits.
Another is the company’s reputation. In recent years, this has gone downhill due to the Neil Woodford saga. This is something it needs to fix.
A good buy?
Weighing this all up, I think Hargreaves Lansdown shares could potentially be one of the FTSE 100’s best buys today. With a low valuation and a high yield, I see the potential for strong returns in the future.
That said, there are a few other FTSE 100 shares I would buy first.
