Is it time to bet on IG Group shares?

IG Group @ 414.10p, -3.60p (-0.86%)

Struggling to understand the anchor ploughing going on with IG Group ahead of its 11 December half yearly update.
It seems to be heading South despite markets tentatively resuming a Northerly direction.

The company has already reported on the first quarter and cited the comparison with August 2011 as a particular exception given the record numbers recorded in that month. 
It also stated that:

"The first quarter of any financial year is normally the lowest revenue quarter for IG, with the prior year an unusual exception to this. The group continues to face tough comparatives at the start of the second quarter, with September 2011 the second highest revenue month in the history of the company. The group anticipates that revenue this year will, as in most years, be weighted towards the second half." (http://www.iggroup.com: IG GROUP HOLDINGS PLC Interim Management Statement).

So we can't anticipate any improvement until we move into 2013.
The July and September sells by the Chairman, Jonathan Davie, and Chief Operating Officer, Peter Hetherington probably haven't helped sentiment either.

The threats seem to be coming from economic pressure on European revenues given the ongoing weakness in this area, and the potential threat of a tax being imposed upon all financial transactions which could affect IG's business:

"The European Union financial transaction tax (EU FTT) is a proposal made by the European Commission to introduce a financial transaction tax (FTT) within the 27 member states of the European Union by 2014. The tax would impact financial transactions betweenfinancial institutions charging 0.1% against the exchange of shares and bonds and 0.01% across derivative contracts." (http://en.wikipedia.org: European Union financial transaction tax).

But, assuming that IG transactions fall under the derivative side and the 10 supporting countries (the UK isn't one of them), are all within IG's business doesn't 0.01% seem small enough to be accommodated between IG and its clients given that rivals would also be affected.

To which, I have to say, possibly naively that I am not overly concerned about given the company's shrewd, and prudent financial management, and balance sheet strength. Particularly with cash balances jumping to £285m as at the July full year update (IG Group beats forecasts. What storm clouds?).

If it wasn't for that being left in the dark feeling I am really tempted to top up my portfolio with more IG given its forecast pe ratio of 11.12 times and forecast dividend yield of 5.5%. Underlying this is the company's market leading position (http://www.prnewswire.com: IG Extends its Lead as the UK's No.1 Spread Betting and CFD Provider), and a healthy balance sheet.

My sensible head says to wait until the 11 December update, expect it to disappoint and then top up ahead of a possibly better second half.

On the other hand it could be oversold now?

But then again, at 157.32p, there is also Vodafone to consider.

Related Article links:

- http://www.iggroup.com: IG GROUP HOLDINGS PLC Interim Management Statement

- http://en.wikipedia.org: European Union financial transaction tax

- http://www.prnewswire.com: IG Extends its Lead as the UK's No.1 Spread Betting and CFD Provider

Related Post links:

- IG Group beats forecasts. What storm clouds?

- Portfolio top up of IG Group.
- October 2012: Portfolio Update (The Long Haul).

FTSE 100 ex. dividends and National Grid highs.

National Grid @ 716.32, +5.32 (+0.007%).

I noticed that National Grid notched up a new 52 week intra-day high this morning ahead of the shares trading ex. the 14.49p dividend on Wednesday.

Interesting to see as well that the FTSE100 could lose 2.49 points on Wednesday as National Grid (2.08), Amec (0.14), Johnson Mathey (0.13), and Tate & Lyle (0.14), all trade without their respective dividend entitlements.
But, as you can see, the biggest contributor to the 2.49 is National Grid due to the size of the company (by capitalisation), its divided yield, and its relative weighting in the FTSE100.

I find it useful to note the impact of dividends (a return of capital), on an index constructed on the relative capitalisations of 100 (or so) companies.
I say that because when listening to negative comments around the FTSE100, inevitably the comment comes up about the FTSE trading sideways for a period. For example, the FTSE100 today is around 5789 as I look at it.
If I was to look back at the 28 November last year it stood at 5552.29. 
So with the index now standing at 5789 (5552.29), we can see that it has moved ahead by 4.26% over 12 months.

Casting the net for information a little further I see that the iShares (nothing to do with Cupertino in this case), FTSE100 Exchange Traded Fund trades at around 578p (http://uk.ishares.com: iShares FTSE 100 (ISF).). 
578p v 5789 (actual FTSE) is close enough in numeric similarity (give or take a decimal place), and you should also be able to see from the chart below (that compares the movement of the ETF with the actual FTSE100 index over 1 year), that the ETF does an extremely good job of achieving its objective of mirroring the FTSE 100.

Chart courtesy of Digitallook.
Click to enlarge, close to return.

The discrepancies come from things like transaction charges, management charges, and timing, or inertia (the fact that the fund can only respond after an event depending upon its declared policy). 
For example as the FTSE declares changes to the line up of the index then the fund will respond accordingly but the exact timing, entry, and exit prices of individual share may differ from the datum prices used by the FTSE.

So recognising that the ETF is a fairly accurate mirror of the FTSE100 it must also do one more thing and that is..... issue dividends.
It is after all holding the same 100 companies, some of which yield dividends
And over the last 12 months the ETF has issued quarterly dividends as follows: 2.66p; 7.44p; 4.56p; and 5.61p. 
20.27p in total.

20.27p divided by the current 578p = 3.51% which is amazingly close to the 3.51% distribution yield published on the information page for this ETF (http://uk.ishares.com: iShares FTSE 100 (ISF).).

So taking this mirrored yield and applying it back to the FTSE then at 5789 (approx.), we can assume that the FTSE has also yielded 3.51% over the last 12 months. As mentioned, they both hold the same 100 companies after all.
3.51% of 5789 is 203.19 points which means that if these dividends hadn't been distributed then the FTSE 100 would actually be at 5992.19!

Going back to the 12 month performance of 5992.19 / 5552.29, then the FTSE 100 would actually be (or is actually!), showing an increase of 7.92% which is just about the oft quoted historical average.

Putting the FTSE100's actual gain to one side, 203.19 points is a sizeable gain in itself and when distributed tax free to basic rate taxpayers stands comparison with anything coming out of our so called savings institutions today.
But despite this income and the opportunity for capital gain, the hurdle for any would be investor remains the risk to capital. This is where realism, acceptance, understanding, and diversification come in to ensure that a suitable level of risk management is in place.

There are also other facets to consider in any comparison, like inflation, and I would still suggest that, where possible, companies balance pricing models in line with inflation whereas very few savings accounts seem to match/better inflation. Real inflation anyway, not the knocked up CPI that the last lot came up with.
And, that being the case then company profits (and shares), stand a better chance of protecting capital against inflation, than savings accounts will on their own.

But savings accounts do have their place in any, and all investment strategies as they also provide a form of diversification as well as easy access to day to day and rainy day funds.

But I'm digressing on my digressing. I started out looking at National Grid and anticipating its ex. dividend status on Wednesday before running off on a tangent of how ex.dividends on Wednesday could affect the FTSE and then how the FTSE100's performance over a period is also affected by dividends.
What I will say is that a significant piece of my current thinking and strategy is how best to make use of these dividends, specifically re-investing them (if you don't need the income of course). 

And, as it is for the FTSE100 on Wednesday, so it is with my portfolio that National Grid is the biggest contributor to my cause with the dividend alone contributing around 1% to my portfolio each year regardless of the FTSE's volatility (October 2012: Portfolio Update (The Long Haul).)

National Grid dividend @ 14.49p per share
- 28 Nov. ex.dividend 
- 16 Jan. payment date

Related links:
- Chart courtesy of Digitallook
- http://uk.ishares.com: iShares FTSE 100 (ISF)

Related posts:
- October 2012: Portfolio Update (The Long Haul)