Why I'd prefer Vodafone Group plc over this top growth stock

Hargreaves Lansdown head office
Hargreaves Lansdown head office

Stock markets are booming, global share prices are at all-time highs, but is this really the right time to invest in one of the UK's largest wealth managers?

Bull running

It is a question I have been grappling with lately because I have been examining the case for buying shares in Hargreaves Lansdown(LSE: HL). Hargreaves has been on a steady charge in this bull market, up 123% over five years, 74% over three and 25% over 12 months. As a result it has been trading at a heady valuation for some time, and is currently yours for a pricey 34.36 times earnings.

That isn't cheap, especially with my inbox flooded with analyst reports reminding me that stock markets are expensive by historic measures, and next week is the 30th anniversary of Black Monday. Is October really the time to take a chance?

Digital drive

Hargreaves' latest update shows it won net new business of £1.54bn in the three months to 30 September, adding another 30,000 new clients, taking the total to 983,000. Assets under administration now total £82bn, up 4% since 30 June. Total net revenues are up 15% year-to-date to £104.1m, with CEO Chris Hill reporting a solid start to the financial year for net new business and revenue.

He said the rise in new business was driven by "improved market sentiment, continued investment in our digital marketing presence, an increase in client numbers and their continued wealth consolidation onto our platform". We all know what Hargreaves does, and it continues to do it well. Digital Look shows operating margins of 67.7%, and return on capital employed of 89.7%. Its current yield is 1.9%, covered 1.5 times, but this is a growth play rather than an income machine.

Income call

It is a long time since anybody called mobile telecommunications giant Vodafone(LSE: VOD) a growth stock, although its share price growth graph does show a steady trend since the lows of 2009, doubling in that time to today's 216p. It is the dividend most people care about, and two figures here tell you everything you need to know about the stock. It yields 6.1% but cover is 0.5.

This is a big company, a £59bn behemoth active in 36 different countries that is in the throes of overhauling its global brand image to pursue its belief that digital will play a positive role in "transforming society" and "enhancing individual quality of life". Which is all very nice but what about the dividend? Is it sustainable?

Wild things

Vodafone is piling on the customers, with 83.5m across the 22 countries where it has 4G and adding another 8.8m in the first quarter. Earnings per share rose 17% in 2017, and although growth will be slower at 4% in 2018, City forecasters reckon it could hit 21% in 2019. The forecast yield is then 6.3%. The group is winning profitable market share in broadband and stealing a march in the Internet of Things thingy. Cover is thin but the cash should keep flowing.

I would be happy to hold both these companies in my portfolio. They balance each other nicely. However, they are both expensive, with Vodafone on a forward valuation of 27.6 times earnings. Maybe save them for that market dip? If it happens, personally, I would buy Vodafone first, Hargreaves Lansdown second.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown. 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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