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The Stock Picker’s Guide To HSBC Holdings Plc

Successful investors use a disciplined approach to picking stocks, and checklists can be a great way to make sure you’ve covered all the bases.

In this series I’m subjecting companies to scrutiny under five headings: prospects, performance, management, safety and valuation.How does HSBC (LSE: HSBC) (NYSE: HBC.US) measure up?

1. Prospects

HSBC is one of just a few truly global banks. That makes it a bank of choice for multinationals, and gives it a strong global brand name in retail business.

With a third of risk weighted assets in Asia Pacific, a quarter in Europe, and a quarter in North America, HSBC’s global spread diversifies its exposure to the economics of any particular country.

Profits have been more concentrated as the West suffered economic meltdown: over 80% of 2012’s underlying profits came from Asia Pacific, with Hong Kong alone contributing 44%. A strong focus on emerging markets, including Latin America, offers the prospect of future growth.

2. Performance

HSBC distinguished itself by surviving the financial crisis unscathed, even maintaining dividend payments, though cutting the payout.

2012’s profits were back to pre-crisis levels.

3. Management

HSBC has suffered some self-inflicted injuries, including its ill-timed and disastrous entry into US sub-prime mortgages with the acquisition of Household, and money-laundering for Mexican drug cartels.

That suggests a breakdown in its colonial management style of appointing good chaps be in charge of running countries. Too big to be bothered about conventions, it recruits its chairmen from the executives.

But new management installed in 2010 has eschewed more big acquisitions and is simplifying the group to exert more central control and strip out costs.

4. Safety

HSBC has comfortable levels of capital, with a core tier 1 ratio of 12.7%, and it had a clean bill of health from the recent Prudential  Regulatory Authority review.

HSBC’s strong position in Hong Kong, and Asia pacific generally, is also a potential weakness. It would no doubt suffer badly from any crisis in the Chinese banking sector.  

5. Valuation

HSBC’s prospective price-to-earnings (P/E) ratio of 10.6 and price to book multiple of 1.1 is on a par with emerging market bank Standard Chartered. The P/E is, surprisingly, cheaper than RBS or Lloyds.

That rating, and a healthy capital position, means it can pay out the best dividend of all the FTSE 100’s banks, with a yield near 5%.

Conclusion

HSBC offers the most generous and safe dividend in the sector. Though a crisis in China could be painful, the bank offers diversification of risk and the share merits serious consideration in an income portfolio.

The Motley Fool’s Top Income Stock for 2013 is currently yielding well over 5%. It has a policy of increasing dividends at least in line with inflation, and it’s in a sector that has good visibility of earnings.  That’s a great dividend to lock in. You can download the report by clicking here — it’s free.

> Tony owns shares in HSBC and Standard Chartered but no other shares mentioned in this article. The Motley Fool owns shares in Standard Chartered.