Why I’m holding off buying IOOF Holdings Limited shares

Credit: Tax

IOOF Holdings Limited (ASX: IFL) is one of Australia’s largest financial service companies, with a market capitalisation of $2.5 billion. IOOF also has a long history, it started in 1946 and it’s been growing ever since.

IOOF operates four main divisions: financial advice and distribution services, platinum management and administration, investment management products, and trustee services.

It has a number of brands which operate within each division such as Ord Minnett, Shadforth and Bridges.

Recent performance

In FY16 IOOF increased its dividend by 3% to 54.5cps, however its underlying earnings per share decreased by 4%. When including one-off significant items, its statutory profit increased by 42% to $196.8m.

A dividend increase is always welcome, as is a big jump in statutory profit, however the underlying business has to keep growing for IOOF to be successful in the future.

What I like about IOOF

There is a lot to like about IOOF; it’s part of a growing superannuation pool and it also has services for SMSFs and retail super fund members.

It has a huge grossed up yield of 9.27%, very appealing for investors searching for yield. At 13.3x FY16’s earnings, it’s quite a bit cheaper than its sector’s average of 17.7x.

IOOF shares are up over 320% since the depths of the GFC, which is a good recovery. Some stocks are still beneath their pre-GFC highs like Suncorp Group Ltd (ASX: SUN).

Why I’m holding off on IOOF shares for now

It’s disappointing that IOOF’s underlying business was slightly down, I prefer to buy businesses that are growing well.

I think there are other investments that will gain more from the growth of superannuation. Challenger Ltd (ASX: CGF) and Class Ltd (ASX: CL1) are my choices to benefit from super.

IOOF has been a very cyclical business. When the GFC hit it decreased its dividend by 33% from 30cps to 17cps. If another large recession happens, I wouldn’t want my dividend income to take that big of a hit.

When am I looking to buy IOOF?

I will be biding my time until another recession hits and IOOF’s share price is hit harder than most other industries.

Foolish takeaway

The best time to buy cyclical stocks is when they’re at the low point in their cycle. IOOF is a good company, but I think there will be an opportune time to buy when the market next goes into bear mode.

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Motley Fool contributor Tristan Harrison owns shares in Challenger Ltd.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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