Finding passive income from dividend yields, strong price appreciation over time, and low share prices is not a straightforward task.
Many of the top dividend companies lack the growth prospects inherent in attractive shares whose prices multiply over time.
As of November 2023, only 24 FTSE 100 companies offer a dividend yield of over 5%.
Only one company in the FTSE 100 has a dividend yield of over 5% and a 10-year average annual revenue growth rate of over 8%. That company is Hargreaves Lansdown (LSE:HL).
What does the company do?
Hargreaves Lansdown is a financial services business predominantly operating as an investment platform.
The company also provides pension services, ISA accounts, wealth management and financial advice, research and tools, cash savings products, and educational resources.
6% yield and growing over time
With a current 6% yield, one would be attracted to investing in Hargreaves Lansdown based just on this fact alone. Yet the company has also seen a 9% average annual dividend growth rate over the past 10 years.
However, the dividend growth rate is slowing. Over the past three years, the average annual dividend growth rate has been 5%, and over the past year, it has been 3%.
8% annual revenue growth
Hargreaves Lansdown also has an 8% 10-year average annual revenue growth rate. This creates a compelling opportunity: a high dividend yield and growth prospects.
Revenue growth is also increasing exponentially. The average annual revenue growth rate over the past five years is 10%, and in the last year, it’s been 26%!
Caution: margin decline
I like to be cautious, though. Understanding the company-specific risks is paramount in portfolio allocation, and one of Hargreaves Lansdown’s major red flags is its margin decline.
While gross and operating margins for the company are still strong, its gross margins have been in a long-term downtrend, with an average annual rate of decline of -1.4%. The operating margin has been in a five-year downtrend, with an average annual rate of decline of -5.6%.
The positives are that the company’s gross margins are currently 80%, and its operating margins are 50%… so I’m not too worried. I think these are very competitive figures.
The price is low: to buy or not to buy?
Here’s the hook… Hargreaves Lansdown shares are currently trading around 70% below their high.
The company seems underpriced to me when considering its revenue growth and high margins (even though they’re in decline).
However, the price may be low for several reasons. These include the company facing increased competition including from new trading apps like eToro, which offer no dealing fees. This is directly affecting margins due to the need to lower fees to remain competitive.
The general economic market is also affecting investor confidence at the moment. This is having a knock-on effect on Hargreaves Lansdown.
That being said, the balance sheet is relatively stable, with total liabilities quite high at 55%, but relatively normal compared to previous levels.
I’m not a shareholder as I’m typically not a dividend investor, but if I were, Hargreaves Lansdown would be at the top of my list.
