Are Dividends Built To Last At HSBC Holdings plc And Vodafone Group plc?

How safe are HSBC Holdings plc’s (LON: HSBA) and Vodafone Group plc’s (LON: VOD) Dividends?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Some dividends have staying power. Companies delivering enduring dividends tend to back their often-rising payouts with robust business and financial achievement.

Fragile dividends, meanwhile, result from weaker operational and financial characteristics. Those are the dividends to avoid. However, fragile dividends often tempt us because of high dividend yields.

How to tell the difference

Under the spotlight today, two FTSE 100 firms: international bank HSBC Holdings (LSE: HSBA) and mobile phone service provider Vodafone Group (LSE: VOD).

These firms operate in different sectors, but they both have a high dividend yield. At a recent share price of 507p HSBC Holdings’ forward yield for 2016 is around 6.7%. At 223p, Vodafone’s yield for the year to March 2017 is 5.1%.

Let’s run some tests to gauge business and financial quality, and score performance in each test out of a maximum five.

1. Dividend record

Both firms enjoy a decent record of ordinary dividends:

Ordinary dividends 2011 2012 2013 2014 2015
HSBC Holdings (cents) 41 45 49 50 51 (e)
Vodafone (pence) 8.9 9.52 10.19 11 11.22

Over four years HSBC Holdings’ dividend rose 24%. Vodafone’s increased by 26%.

For their dividend records, I’m scoring both firms 4/5.

2. Dividend cover

HSBC Holdings expects its 2016 adjusted earnings to cover its dividend around 1.5 times. Vodafone’s earnings look set to fall short of covering the forward dividend payout by around 50%.

However, cash pays dividends, so it’s worth digging deeper into how well, or poorly, both companies cover their dividend payouts with free cash flow, too. Last year, for example, Vodafone’s declared free cash flow failed to cover its dividend payments.

So , on dividend cover from earnings, I’m scoring HSBC Holdings 3/5 and Vodafone 0/5.  

3. Cash flow

Dividend cover from earnings means little if cash flow doesn’t support profits.

Here are the firms’ recent records on cash flow compared to profits:

  2010 2011 2012 2013 2014
HSBC Holdings          
Operating profit ($m) 16,520 18,608 17,092 20,240 16,148
Net cash from operations ($m) 55,742 79,762 (9,156) 44,977 (21,372)
Vodafone          
Operating profit (£m) 537 6,224 (2,777) (4,191) 2,030
Net cash from operations (£m) 11,995 12,755 8,824 6,227 9,715

HSBC Holdings’ ability to generate cash from its operations fluctuates. However, cash flow in banking business is a less useful indicator of business health than it is at other types of business. Banks’ cash flows tend to be ‘noisy’, as we see here. Accounting quirks — such as how the banks classify their loans and investments, for example — can bolster or lower a cash-flow number artificially.

Vodafone’s cash performance is much steadier and the amounts of cash realised support declared profits well.

I’m scoring HSBC Holdings a benefit-of-the-doubt 3/5 and Vodafone 5/5.

4. Gross debt

Interest payments on borrowed money compete with dividend payments for incoming cash flow. That’s why big debts are undesirable in dividend-led investments.

Most banks carry big external debts and HSBC Holdings’ balance sheet entry for debt securities alone was almost six times the level of its operating profit in 2014. Vodafone’s borrowings run at around four times the level of cash generated annually from operations.

For their debt positions, both firms get 2/5.

5. Degree of cyclicality

HSBC Holdings’ share price moved from around 700p at the beginning of 2011 to 507p or so today, handing investors a 28% capital loss over the period, which is likely to have taken away any gains from dividend income.

Vodafone moved from around 170p at the start of 2011 to around 223p today, providing investors with a 31% capital gain.

HSBC Holdings’ share-price volatility results from cyclical effects, as we might expect with a bank.

I’m scoring HSBC Holdings a generous 2/5 and Vodafone 3/5 for its cyclicality.

Putting it all together

Here are the final scores for these firms:

  HSBC Vodafone
Dividend record 4 4
Dividend cover 3 0
Cash flow 3 5
Debt 2 2
Degree of cyclicality 2 3
Total score out of 25 14 14

Neither firm is perfect by these measures, which makes me cautious about selecting them as dividend-led investments.

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.

Kevin Godbold has no position in any shares mentioned. 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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »