It’s not often that two high-quality businesses go on sale at bargain prices, but in my view, both Standard Chartered (LSE: STAN) and HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US) are too cheap to ignore at their current prices.
Here’s why:
| HSBC Holdings | Standard Chartered | |
|---|---|---|
| 2014 forecast earnings per share growth | 14.0% | 11.2% |
| 2014 forecast P/E ratio | 11.0 | 10.5 |
| 2014 forecast yield | 5.2% | 4.0% |
City analysts’ consensus forecasts for both banks suggest that they will deliver double-digit earnings per share (EPS) growth this year, in-line with the FTSE 100 average forecast EPS growth of 12.9%.
However, while the FTSE 100 trades on a forecast P/E of 15.3, HSBC and Standard Chartered are valued much more cheaply, and as a result, offer much higher dividend yields.
Forecasts can be wrong…
Although consensus forecasts (the average of a number of individual analysts’ forecasts) are usually fairly accurate for large companies, they aren’t guaranteed.
However, for more reassurance, we can look at the trailing figures for both banks, which I’ve calculated using their 2013 results:
- HSBC trades on a trailing P/E ratio of 12.2 and has a trailing dividend yield of 4.8%.
- Standard Chartered trades on a trailing P/E of 11.7 and has a trailing yield of 3.9%.
In my view, neither of these valuations is pricing in much growth in 2014, giving value-seeking investors a good opportunity to snap up cheap shares in high-quality businesses (remember that the FTSE 100 is currently trading in a trailing P/E of 18.1).
What about other risks?
Both banks have been busy selling non-core parts of their businesses recently.
HSBC has sold 63 businesses in the last year, in an attempt to tighten its focus and improve is profitability, while earlier this week press reports suggested that Standard Chartered may soon announce a $700m deal to sell its Hong Kong consumer finance unit, which has historically generated high returns from high-risk unsecured loans.
In both cases, the banks’ timing seems good — some slowdown in Asian growth looks likely, so it’s an appropriate time to boost cash levels and focus on core, lower risk banking activities.
Buy HSBC or Standard Chartered?
I reckon that both banks are a cracking buy at the moment, but analysts are expecting HSBC to increase its dividend by 7.4% in 2014 and by 9.1% in 2015, whereas Standard Chartered is only expected to hike its dividend by 1.2% this year and by 6.7% in 2015.
HSBC’s yield is already higher, and its greater size and capital strength make it a lower-risk bet than Standard Chartered, so if I was buying today, I’d buy HSBC.
