As a stock market correction looms and global markets continue their volatile swings, I believe there are still opportunities to be seized and cheap shares around to hold through thick and thin. This FTSE 250 company has a strong balance sheet and has a positive outlook – despite any forthcoming volatility. Do I think it’s a safe buy for my portfolio?
Online trading provider IG Group (LSE:IGG) saw profits grow by 52% in 2021 as a result of a surge in transactions from a growing number of retail investor clients. The company noted in its last annual report that increased market volatility over the last couple of years have boosted the demand for trading services, as clients aim to seize volatility-related opportunities. As a stock market correction and volatility returns, I believe IG Group will see a surge in transaction volume once more and enjoy another lift to the bottom line.
A FTSE 250 company with international ambitions
In the last couple of years, IG Group has undergone an expansion away from the UK into new markets and bought US brokerage Tastytrade to capture more US clientele. Tastytrade saw revenue growth of 29% in the last five months and has also benefitted from retail investors and high options demand.
The continuing expansion is leading to increased business costs and harming profit margins in the short term. However, as the expansion slows, IG Group will likely see a fall in expansion costs while maintaining high revenues from foreign business ventures.
Robust finances
IG Group’s finances are certainly not in a bad place, with debt of £300m easily covered by the company’s cash and cash equivalents of around £660m. The company also sustains an impressive 5.7% dividend while still only paying out 44% of earnings, meaning that most earnings are reinvested into expansion and other business ventures. As expansion costs decrease, the company has the option to raise dividends slightly and reward loyal shareholders.
The UK share is currently trading with a price-to-earnings ratio of only 7.8 and has returned a robust 22% return-on-equity in the last year. Alongside this, the market has pushed the stock down 11% in the last six months, which I believe does not fit with the current narrative.
Caution ahead?
It would be wrong for me to suggest that IG Group is completely immune to the effects of a stock market correction. If a fall in the markets scares investors and drives them away from trading, the demand for the company’s trading services would fall and profits would be harmed. The company is also highly sensitive to UK regulations surrounding the financial derivatives it sells, which creates risks outside of business control.
Despite the small risks associated with this share, I still believe that IG Group is in a good place to profit from the current stock market volatility. Strong financial foundations, an impressive dividend, and a compression of the share price in recent months further increased my confidence and encouraged me to add this cheap UK share to my portfolio.
Finlay Blair owns shares in IG Group Holdings. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
