Between the beginning of May 2005 and end of August 2016, IG Group (LSE: IGG) looked as if it could do no wrong. As the company’s revenue and profits expanded, so did the share price. It jumped from around 100p to nearly 950p in just over a decade, that’s without taking into account dividends paid to investors during this period.
However, towards the end of 2016, regulators across Europe announced they would be looking to crack down on the sale of risky derivatives contracts by companies like IG to inexperienced retail traders. Regulators’ initial proposals finally became law during the second half of 2018, and they have had a significant impact on IG.
Management now believes that revenues will fall 17% year-on-year for the recently ended 2019 financial year. Operating profit for the period is expected to be around £190m, compared to £281m.
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These figures are disappointing, but I believe there is a great opportunity here. As well as publishing a trading update for the financial year ending 31 May 2019 today, IG also announced its four-point business plan for returning to growth.
Growth plan
To deliver revenue growth, management has set out what it is calling its “four levers” that include expanded distribution channels, a global firm with a more local focus, segmented target markets and multi-product offerings.
Essentially, this corporate speak means that the company is planning to look away from its core European and UK markets for growth, targeting opportunities in regions such as Australia, Singapore, the United States and Japan where it is still a relatively small operation. IG is also planning to launch new products and partnerships in its key markets. One potential opportunity the group has identified is the leverage securities market for retail clients in Hong Kong.
According to management’s estimates, revenue from these “four levers” or “significant opportunities” will be around £60m for the recently concluded 2019 financial year. Going forward, the group is targeting revenues of £160m from “significant opportunities” by 2022 which, when combined with revenue growth of around 3% to 5% over the medium term from core markets, puts IG on track to report revenues that are approximately 30% higher from current levels in fiscal 2022, management believes.
Time to buy?
There’s no denying that IG has been through a rough patch over the past 24 months, but now management has a plan in place to return to growth, I’m optimistic that it is on the road to recovery.
What’s more, today, management has declared that the dividend is here to stay for the foreseeable future. Specifically, today’s strategic update notes, “the company expects to maintain the annual dividend at 43.2p per share until the group’s earnings allow the company to resume progressive dividends.” This only adds to the appeal of the stock in my opinion, because, at current levels, shares in IG are yielding 9.1% so investors will be paid to wait while the business returns to growth.
So overall, now that IG has published its plan, I think now could be the time to buy this FTSE 250 income stock.
