Sometimes a little piece of news can make me totally reassess a business. And that’s just happened with an old favourite here at The Right Side.
IG Group (LSE: IGG), the UK’s oldest spread betting firm, which I’ve written about before, released figures this week. Nothing too exciting, as it happens, just another set of solid numbers and news that it’s paying out even more of its profits through the dividend.
But boy, was there ever a nugget of news in there that’s got me excited!
In all the time I’ve been involved with IG, it never even crossed my mind that they would start to develop into the business they’re now talking about.
I’m talking about a change into a new area where IG can excel. Hold on to your hat, because this could be a game-changer.
It’s unique in the whole FTSE 250
As I said, as far as the results go, nothing much to report. Turnover and profits edged up a couple of percent.
If you’re an investor, you’ll be delighted to see that the dividend has been raised. With earnings per share coming in at 40.2p, IG will pay out a whopping 70% of it to shareholders.
Extravagant? Well no, not really. You see, IG Group is kind of unique within the financial sector.
In fact, it’s kind of unique within the whole FTSE 250, because it has no debt.
Companies with balance sheets this strong can pay out a much higher proportion of their profits as dividends. After all, they don’t carry all the risks of, shall we say, more ‘financially engineered’ companies.
Most companies in IG’s shoes would have been courted by a clever banking group telling them all about the benefits of leveraging up the group balance sheet.
But, of course, IG is run by a shrewd lot – their very job is risk management, after all – and they know how to run a solid business.
Great, great, great. But now let me tell you about what’s really getting me excited.
Now it’s going mainstream
Much as I love the FT, it got its headline completely wrong this time.
As you can tell from “IG group shares surge on raised dividend”, the FT concluded that the 8% surge in IG was all down to the fact that it’s raising its dividend. Given that profits were flat, the higher dividend is barnstorming news.
But the real reason for the surge was because it announced that it’s going into the stockbroking business.
In fact, more than just going into it – it’s already established a pilot, with a limited number of ‘live’ clients. The full launch for UK and Ireland is expected in September.
This is important, because it means is it’s already got the system up and running.
And it’s not just offering any old service.
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“Of course we’re bloody worried!”
“We offer streaming live prices which are sourced from both the primary exchange and multilateral trading facilities.
“We provide smart order routing into the best execution venue, and the ability to see market depth and interact directly with the order book.
“This level of functionality is not currently available in the UK market and we believe it will ultimately form a compelling offering”
Sounds good to me – but how is it going to do it?
Well, at first IG wants to win over its existing spread betting, CFD trading and forex customers – because it says that most of them also have online brokerage accounts elsewhere.
And there’s a very good reason why clients will shift to IG.
You see, it intends to allow its clients to use their share portfolios as collateral for their spread-bet positions. As things stand, IG clients have to fund their open bets with cash collateral. The new service will free up cash – an absolute boon for its customers.
Spread betting and contracts for difference (CFDs) are niche products. Stockbroking is not.
This means that IG is going mainstream, so it’s going to be fishing for customers in a much larger pool. And after it’s sewn up existing clients, it’s going after everyone else.
Yesterday, I spoke to an old mate of mine who’s with a private client stockbroker. I asked him if he was worried. And I must confess, I had to pull the phone away from my ear as he responded:
“Of course we’re bloody worried!”
I’ll be signing up to this one myself
I’m amazed I never saw this coming.
I mean, IG has everything it needs to launch a great stockbroking service. It appears it’s got any regulatory issues sewn up too… I mean, the pilot project is already live!
I suspect IG will be very successful in migrating current customers to its stockbroker service, and once it tackles the mainstream market, things could get better and better.
What’s more, new stockbroking clients will provide a whole new brigade of punters to cross-sell spread betting and CFD services to.
Now, though I love the business model, I also have a little niggle too. Many investors get burned by spread betting – if you don’t know what you’re doing, it can be an unmitigated disaster.
Most learn the error of their ways quickly – cash-calls come thick and fast! – but frankly, the thought of punters using share portfolios to back their betting activities sends a shiver down my spine.
But for people who do know what they’re doing, I believe this is likely to be an absolutely awesome service. And there’s no compunction on clients to trial the more risky stuff.
I for one will be signing up to IG’s stockbroker service in September.
And as far as the stock goes, at over £6, it’s up considerably from the £4.50 it was when I first started singing its praises. But surely this new development brings a step change to proceedings.
The FT completely missed the point. But mark my words, the market won’t.
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