Can investing in wealth managers make you wealthy? That’s the question I’m asking today, as Brewin Dolphin Holdings (LSE: BRW) publishes its end-of-year interims, with the stock falling almost 4% despite chief executive David Nicol hailing “another successful year.”
Trouble Brewin?
This kind of mismatch is familiar to regular readers of company reports, as management and markets have very different ideas of what constitutes successful. Luckily in this sector, there’s one good benchmark in the advisor sector, investment platform Hargreaves Lansdown (LSE: HL), which has been setting the pace for years.
FTSE 250-listed Brewin Dolphin produced some positive figures today, including a 10.7% jump in pre-tax profits to £77.5m, slightly better than expected. Total funds under management grew 6.7% to £42.8bn, although analysts had hoped for £43.1bn.
Discretionary funds under management rose 11.2% to £37.6bn, helped by strong gross inflows of £3.2bn, and stable outflows of £1.3bn.
Strong stuff
Basic earnings per share jumped 18% to 19.5p, while Brewin hiked its full-year dividend by 9.3% to 16.4p a share. Nicol said the results proved the continued value of its personalised advice-led model, which was driving “strong earnings and dividend growth.”
The market response looks a little harsh and may reflect wider uncertainties amid Brexit and global growth fears. However, this could work in the group’s favour by driving demand for personalised advice. Perhaps it reflects a valuation of 15.3 times earnings, which is hardly bargain territory, despite a 10% share price dip in the past six months.
Its stock is up a modest 20% over five years, so maybe investors are generally wary. Yet earnings growth is steady, and the stock now yields a wealth-generating 4.9%, with cover of 1.3. Tempting.
Big juicy bagger
Brewin Dolphin is betting that demand for its high-margin wealth management services will remain robust. In contrast, Hargreaves Lansdown has made a hugely successful play for the DIY investor market, where its online platform is the biggest hitter. Investors have reaped the benefit, with the stock up 60% in the last two years, while over 10 years, it’s a 12-bagger, its share price rising from 165p to 1948p over that time.
As ever, the big question is whether it can continue to grow at the same breakneck pace. Actually, that’s easy to answer. FTSE 100 companies simply can’t do it purely due to their scale, as Hargreaves now has a hefty market capitalisation of £9.25bn.
Keep going
My worry is that it’s still priced for rapid growth, trading at 37.9 times forecast earnings. On the other hand, it has continued to deliver, with net customer inflows of £7.6bn in the year to 30 June, up an impressive 10%. City analysts are forecasting 13% earnings per share growth in the year to next June, so it might deliver again. It also enjoys high profit margins, currently 65.3%.
Further stock market volatility would be a blow, especially if this scares away mass market private investors. However, October’s travails left the stock trading 15% below its year-high of 2280p, so today might even be a buying opportunity. Hargreaves cannot keep rising forever, but I’ve said that before, and it proved me wrong then.