Why I’d buy this FTSE 250 stock yielding 12% after today’s news

Since hitting an all-time high of 2,008p at the beginning of August, shares in Plus500(LSE: PLUS), the online contracts for difference provider, have fallen in value by more than 30%. And it’s not just Plus that’s feeling the heat. The company’s peers, IG Group and CMC, have seen their shares decline by a similar amount since the summer.

The market is worried about the impact of new rules restricting retail betters from gambling on risky products will have on these companies. All three have warned investors that the rules will hit profits, although, as of yet, it’s not exactly clear how much of an impact the changes will have. This uncertainty seems to have hit investor sentiment almost more than the new rules on trading themselves.

However today, Plus has defied market expectations by announcing in a trading update it now thinks full-year results will be ahead of market expectations.

According to CEO Asaf Elimelech, the company has experienced “positive momentum for October and November,” and, following this performance, management now believes the company is in a “good position for 2019” as it continues to “focus on acquiring high-value customers as well as growing in existing and new jurisdictions.“

Avoiding the storm

Unfortunately, Plus500 has not provided any figures in today’s update, so we don’t know how far it’s ahead of City targets.

Analysts are expecting full-year revenues of $664m for 2018, up 52% year-on-year, and earnings before interest, tax, depreciation and amortisation (EBITDA) of $448m, up 73%. However, I expect these numbers to revised higher over the next few months, as analysts revisit their calculations.

So, is the worst now behind Plus500? Considering today’s trading update, it looks as if the company is coping with the new regulatory environment quite well.

That said, the new regulations placing restrictions on the amount Plus’s punters are allowed to borrow only came into force back in August. So it’s still early days and we don’t know how these changes will impact the company over the long term. Only a few months ago, management warned shareholders that the changes could impact around a third of group revenues.

On my watchlist

Considering the above, I’ve put it on my watchlist because, while the company’s outlook is still uncertain, I reckon there’s already plenty of bad news baked into the stock’s current valuation. And any unforeseen good news could result in a sudden rally higher.

Indeed, at the time of writing, shares in the company are changing hands for just under 7 times forward earnings which, in my view, discounts much of the risk surrounding the business. According to my figures, at this valuation, even if revenues fall by 30%, investors are still getting a good deal.

And on top of this attractive valuation, Plus supports a double-digit dividend yield of 12%. With its history of distributing around 90% of profits to investors, I think this is one of the most shareholder-friendly businesses around.

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Rupert Hargreaves owns no share mentioned. 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.

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