FTSE 250 Dividend King Analysis: PLUS500 (LON:PLUS)

Plus500 Analysis: It’s about time we took a look at some shares which are paying extremely high dividends. PLUS500 is perhaps one of the more notable ones to look at. This was already paying dividends at quite a healthy rate, but there were a couple of things that have happened both in the industry and at company levels which has decimated its share price.

As we can see over the past year, the share price almost touched 2000p before a horrific decline. The net result of this is that the yield on the shares (assuming the dividends are held, of course) are at obscene levels. Dividend Data report this at 20.61%, and even the projected dividend from Stockopedia comes in at 13.7%.

Plus500 Analysis: Current Trading

The last update was bad. Preliminary results came in on the 12th Feb which produced a large increase in the year-on-year metrics. However the main bugbear was the ESMA restrictions which heavily clamp down on firms offering CFDs, and results for the current year are anticipated to be worse, although quite how much was restricted to the word ‘materially’.

Even worse was a bungled admission that the company had lost money due to client trading: something that it had denied doing in previous reports. A hastily-led correction ascribing this to a ‘drafting error’ did little to reverse the damages done here. The obvious question being: were the previous profits real, or simply down to the markets, and what happens if there are adverse events?

The outlook is not great for financial betting firms: CMC Markets and IG Index have also suffered as part of the general regulatory developments. That being said, these firms are still profitable, and in some cases, heavily so.

Plus500 Analysis: Future Prospects

Helpfully, Liberum produced a research note (available on Research Tree). It has pointed out that PLUS is targeting new territories, which is sensible. As a bottom-end product, the platform would be easy to roll out, and excessive regulation may actually have an upside: it would be much harder for new competitors to come in.

However, what is not addressed is the downsides: what happens when the easy money (mug punters) run out. The Plus500 model more so than others is based on high customer churn, and with ESMA regulations explicitly ruling out incentives, this has also levelled the playing field somewhat between existing players.

The regulations have changed customer behaviour and with them being so recent, it is arguably very difficult to foresee what may occur. Revenues may be very volatile. Balancing this out is the extremely low value of the company relative to cash and profits. In the past Plus500 had grown at a meteoric pace, although this can now be safely forgotten. EBITDA is forecast by Liberum to almost halve in 2019 to $272m.

Dividend Policy

Stated policy is to pay out 60% of net profits in a mixture of shares and buy-backs, although in the past they have exceeded this. The share buy-back program is rather benign, and only $10m is marked for this.

Cash Generation

If we are minded to think that previous profits were genuine and not as a result of market P+L (the company have guided that this was not the case), the business is hugely cash generative. A snippet from the preliminaries shows:

The company is highly efficient at converting its revenues to cash. Most of its expenses lie within the technology it has. The cash position is strong, at year end it was $315m. Clearly, unlike a few other companies, Plus is not financing its dividend payouts via debt.

Plus500 Analysis: Comment

Clearly the issues are going to be what form the figures are going to take going forward. One major fly in the ointment was a director sale. Alon Gonen cashed out £31.75m of shares in December, which always sends a poor signal to the market.

Some rather substantial forecasts were made by Liberum, and it is difficult to know whether these are optimistic or not. The bottom line on the forecasts is that the projected dividend per share for next year is 89p. This reflects the lower level of cash generated by operations. In real terms investors may see less than this because of the tax regime of Plus. But crucially even at this level the business continues to generate cash even after dividends have been paid out.

The next issue would be whether the dividend policy actually changes from the 60% ratio. If profits can be maintained, there would seem to be little reason to cut. The company has cash. It would be difficult to envisage an event which would require such a large-scale use of cash. A takeover of another firm may represent quite poor value, as many customers would already have accounts at both.

Going forward I would feel that their main battleground of ‘recreational’ trading might be pretty safe. The strategic response of others such as IG Group has been to target professional customers as these generate higher average revenues. But everyone has to start somewhere, and CFDs clearly have their upsides for certain segments of the market.

It seems good, but thoughts need to be tempered with the fact that this could all go wrong in a black swan type of event, and there is no real transparency in the business. This would put off a lot of investors. I think for this reason it will always trade at a discount to the more established peers even if business improves.

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