I love the look of this FTSE 250 company for building a second income

There are plenty of companies in the FTSE 250 paying a high dividend, but few appear as undervalued as one company I’ve got my eye on.

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Over the last few years, the number of people investing and trading in the stock market has ballooned. According to HSBC, around 36% of Brits invest their money in the stock market. But as we move away from hyper-growth and meme stocks, I want to be looking at FTSE 250 companies with sustainable growth prospects.

IG Group

One of the FTSE 250 companies I’m most excited about is IG Group (LSE:IGG). The company offers access to 19,000 markets in shares, commodities, equities, and fixed income assets, as well as more complex instruments, such as options.

As noted, the number of retail investors has grown substantially since the pandemic, where large amounts of free time, and the prospect of massive profits, boosted platforms such as IG. In IG’s 2022 Annual Report, user numbers have risen from 5,000 in 2019, to a massive 25,000 in 2022.

The share price has been on a downward trend in recent years, but as the business continues to grow and improve, I expect this to be an opportunity to buy shares at a discount.

Why would I want to invest?

In a time of economic uncertainty, platforms offering trading services might not seem a lucrative part of the market. However, despite 2022 being one of the worst years we’ve seen in decades, revenue for IG Group continued to grow steadily. Investors may be just as active in a market trending downwards as they are when times are good, bringing transaction fees and revenue to the business.

Putting the economic environment aside, the business looks pretty solid. With a price-to-earnings (P/E) ratio of 6.8 times, IG Group is substantially below the sector average of 15.7 times. Furthermore, with the share price currently at £6.32, a discounted cash flow calculation of future cash flows suggests there could be growth of 57% before the fair value of £14.64 is realised. Analysts covering the company also consider there to be about 60% growth possible in the next year for the share price.

These are all good signs for the company, but the really exciting part for investors is the dividend of 7.2%. This is by no means the largest in the FTSE 250, but rarely do we see large growth potential alongside such a generous dividend. The company has a solid reputation for growing dividend payments, and has healthy cash reserves to continue.

What are the risks?

With fears of a recession, there is a risk that trading activity decreases substantially. This would likely continue the downward trend of the share price, but at some point, the potential growth in the company will become attractive to investors.

Regulation is always a potential issue when investing in financial services. With IG now also looking to move into more markets, more regulation will be encountered. However, the move will potentially offer some revenue diversification, meaning that there is less risk to operations if any specific country becomes more stringent.

Am I buying?

Overall, I expect IG Group to be a winner in the next few years. The company in general appears to be in great shape, and with such a healthy dividend, I expect investors to start getting interested again soon. I want to be ahead of the crowd, so will be picking up shares at the next opportunity.

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.

Gordon Best 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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