I don’t spend enough time researching the FTSE 250. I’m usually too busy exploring the FTSE 100, where I’ve found more than enough dirt cheap, high-yielding blue-chips to keep me happy.
Clearly, I need to widen my net, because I think I’ve just found a terrific FTSE 250 dividend growth stock I’m tempted to buy in June.
The company in question is online trading platform IG Group Holdings (LSE: IGG), which I know pretty well because I regularly quote its market experts in articles.
Share-trading opportunity
IG gives traders access to spread betting and contracts for difference (CFD) trading, allowing them to bet on equities, bonds and currencies without owning the underlying assets.
I’ve dabbled in spread betting and, like most people, I lost money. These days, I follow the Foolish philosophy of targeting undervalued companies, with the aim of holding them through thick and thin, while reinvesting their dividends for growth. Now I’m making money.
Happily for IG, plenty of people do like to trade in risky instruments like CFDs, although the downside is that their numbers tend to wax and wane in line with market sentiment. Right now the stock’s in recovery mode after a sticky few years, climbing 15.57% in the last year, against 10.31% on the FTSE 250 as a whole.
While I prefer to buy stocks when their shares are down rather than up, that level of growth isn’t off-putting. There’s still value here with the stock trading at 8.35 times trailing earnings. That’s comfortably below the index average of 12.7 times.
IG Group’s also a UK Dividend Aristocrat, having met the S&P UK High Yield Dividend Aristocrats index qualification of increasing its dividend for more than seven years. The trailing yield is 5.71%, covered 2.1 times by earnings. That easily beats the FTSE 250 average of 3.41%.
Softer coditions
In January, IG was struggling with adjusted pre-tax profits, down 21% to £205.7m, as client numbers fell amid “softer market conditions”. It did benefit from higher interest rates, which boosted net interest income from £24.2m to £70.2m.
By March, things had stabilised and the board said full-year results should be in line with market expectations when published on 25 July. Broker Shore Capital’s claim that IG offered “deep value”helped lift the stock. The recent stock market surge has pushed the share price up 5.68% in the last month. So should I hope on board and buy it in June?
A high dividend, low valuation and strong balance sheet should make this the perfect stock for me. Yet I’m wary. Spread betting and CFDs is risky business. Punters will come and go. Hopefully, a flow of new blood will replace old, but plenty will leave disillusioned and never return.
Shore Capital also pointed out the IG has to generate £260m in Q4 to hit full-year targets. If it falls short, the stock could take a hit. There’s a fair chance it will exceed that, given recent market bouyancy, but it’s a gamble.
Given the type of business this is, I would rather invest on bad news and good. So I’ll hold myfire this month. Maybe I’ll buy IG Group shares on 26 July. If the news is bad enough.
