Could this FTSE 250 firm’s earnings fall by 70%?

This FTSE 250 stock has had a tough few years, falling by 10.3% over one year and 56.2% over five years. But are its earnings set to crash massively?

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The UK’s FTSE 250 hasn’t had a great start to 2024. The index is down 2.7% since 29 December and has declined 3.7% over one year. And over five years, the decline is 1.2%.

However, the above returns exclude cash dividends — the primary reason why my wife and I have bought into various FTSE 100 and FTSE 250 companies over the last 20 months.

Dividends aren’t sacred

Alas, future and undeclared dividends are not guaranteed, so companies can cut or cancel these payouts without notice. This happened repeatedly during the Covid-19 crisis.

Also, most London-listed businesses don’t pay dividends to shareholders. Some may be loss-making, while others reinvest their profits to boost future growth.

Nevertheless, my family increasingly rely on share dividends for passive income. But what if this strategy goes wrong?

Hargreaves Lansdown hits a bump

My wife and I bought FTSE 250 stock Hargreaves Lansdown (LSE: HL) for its above-market dividend yield in August 2023, paying 801.5p a share.

The share price has been rocky ever since, including falling to a 52-week low of 676.4p on 25 October 2023. On 27 February, this stock closed at 753.6p, valuing the investment platform at £3.6bn. At this price, we are sitting on a paper loss of 6%.

So far, investing in Hargreaves Lansdown hasn’t been plain sailing. However, according to one hedge-fund manager who is betting against the stock, quoted in a Financial Times article, the group is “structurally challenged…it has a very high market share, but provides an inferior product and overcharges for it”.

This nameless critic then argues that fee cuts by Hargreaves Lansdown to compete more aggressively with rival providers could hit the group’s bottom line. This, together with lower interest margins on clients’ cash balances, could “herald a 70 per cent drop in earnings.” Yikes.

I’m not convinced

Of course, the above fund manager is likely ‘talking his/her own book’ by attacking a stock s/he wants to fall. Hence, I’m not convinced that this awful outcome is necessarily on the cards.

In its half-year results released on 22 February, Hargreaves Lansdown released a mixed set of figures. These included the following highlights:

1. Assets under administration up 6.1% since 30 June to a record £142.2bn

2. Net fund inflows of £1bn

3. Revenues up 5.2% to £368.2m

4. Pre-tax profits of £182.5m, down 7.6%

5. Earnings per share of 28.5p, down 13.9%

6. An interim dividend of 13.2p, up 3.9%

Meanwhile, Hargreaves Lansdown’s customer base has increased slightly to 1.82m — about 1 in 37 of the entire UK population, while its client-retention rate dipped to 91.6%.

To me, these aren’t the results of a company clearly heading for the rocks. Then again, future margin erosion would depress revenues and earnings yet further.

Nevertheless, CEO Dan Olley — in the job since August — has an uphill mountain to climb. Clients complain of high and hidden charges, IT issues, outdated mobile apps and other service issues. That’s why Olley is investing heavily in new staff and tech upgrades.

It remains to be seen whether the above fund manager or I (as a shareholder) will be proved right. But I’m happy to keep banking Hargreaves Lansdown’s 5.6% yearly dividend yield while I await developments!

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.

Cliff D’Arcy has an economic interest in Hargreaves Lansdown. The Motley Fool UK has recommended Hargreaves Lansdown. 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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