Where’s Best To Invest? HSBC Holdings plc, Severn Trent Plc Or Bellway plc?

Which of these 3 stocks should you buy first? HSBC Holdings plc (LON: HSBA), Severn Trent Plc (LON: SVT) or Bellway plc (LON: BWY)

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It’s been another disappointing year thus far for HSBC (LSE: HSBA) (NYSE: HSBC.US), with shares in the banking major dipping by 1% since the turn of the year. Clearly, there are a number of challenges that the company faces, with the potential for a relocation to Hong Kong in order to save money on taxes being a direct result of a cost base that has reached its highest ever level. As such, the company is also seeking to shed jobs and reduce its cost:income ratio.

However, it remains a superb income stock. For example, HSBC currently yields a hugely impressive 5.5%, which is much higher than the yields of either Severn Trent (LSE: SVT) or Bellway (LSE: BWY), which yield 3.7% and 3% respectively. Despite this, could income-seeking investors be better off with Severn Trent or Bellway, rather than HSBC, in the long run?

Valuation

Although Severn Trent remains a highly defensive stock that is likely to provide very consistent financial performance moving forward, its shares appear to include a bid premium that makes them relatively expensive at the present time. For example, Severn Trent trades on a price to earnings (P/E) ratio of 25 and, while a bid over the medium to long term is a distinct possibility, when the FTSE 100 has a P/E ratio of 16, some investors may be put off by this rating.

Meanwhile, HSBC and Bellway are significantly cheaper than Severn Trent, with them both having P/E ratios of 11.2. And, looking ahead, the two companies have excellent growth prospects, too. For example, HSBC is expected to grow its earnings by 24% in the current year, which is over three times the growth rate of the wider index, while Bellway’s growth potential is even more appealing, with it being forecast to post a 37% rise in its bottom line in the current year.

Payout Ratio

In addition, HSBC and Bellway appear to have greater scope to increase dividends at a brisk pace moving forward than is the case for Severn Trent. That’s because Severn Trent currently pays out 93% of its net profit as dividends which, while sustainable due to its stable business model, does not have scope to move much higher. However, HSBC and Bellway have payout ratios of just 62% and 33% respectively, which indicate that their dividends could move much, much higher.

Looking Ahead

While the outlook for Severn Trent is very stable, with the water services sector unlikely to come under significant political pressure, HSBC’s future remains much higher risk. That’s because, while it is focusing on Asia for growth, China is continuing to experience a soft landing and, although government stimulus is fairly likely over the medium term, the economy’s growth rate may fall moving forward.

Meanwhile, Bellway appears to have a very bright future, with there being a supply/demand imbalance in UK housing that looks set to persist for many years to come. And, while the prospect of the UK leaving the EU is a real threat in terms of it limiting foreign investment to the UK, Bellway’s current share price and valuation appear to take this risk into account.

However, while all three stocks appear to be worth buying, HSBC remains my top dividend pick. Although Severn Trent may be more stable and Bellway may have better growth prospects as well as a lower payout ratio, HSBC’s high yield, modest payout ratio, impressive growth prospects and low valuation provide balance and a middle road that makes it a stunning income stock.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of Bellway, HSBC Holdings, and Severn Trent. The Motley Fool UK has recommended HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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