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3 reasons why I’d buy HSBC Holdings plc despite recent gains

Image: HSBC. Fair use.

This week’s 2016 results caused shares of banking giant HSBC Holdings (LSE: HSBA) to fall by more than 5%, wiping nearly £10bn from its market value. Investors were clearly unhappy with, or at least confused by, the firm’s mixed bag of figures.

As a shareholder, I’ve been taking a closer look at yesterday’s results. However, before I give you my take on the figures, I think it’s worth pointing out that HSBC shares are still worth 50% more than they were a year ago.

A round of profit taking by investors who bought into last year’s slump isn’t surprising. But I don’t think it’s necessarily a sell signal for long-term shareholders.

1. An average yield of 6%

HSBC’s weak earnings performance has been disappointing over the last five years. But this hasn’t stopped the bank from returning a total of $50bn to shareholders through dividend payments.

At the current share price of 665p, that’s equivalent to a total cash yield of 30%. Over five years, that’s an average dividend yield of 6% per year. For income investors who don’t want to sell shares, this reliable high yield is a valuable asset.

A second point is that as the average long-term total return from equities is only 8%-9%. So HSBC would only have to deliver modest share price gains to beat the long-term average returns available from the market.

2. Don’t make unfair comparisons

I downloaded a copy of HSBC’s 2006 annual report yesterday, and was interested to find that the group reported earnings of $1.40 per share 11 years ago. That’s more than twice the $0.69 per share analysts are forecasting for 2018.

You might think this is a sign of the bank’s decline. I think that’s unfair. In 2006, interest rates were at mid-single digit levels, rather than almost at zero. The profitability of the banking industry was much higher.

Banks today are more heavily regulated, more conservatively financed, and are operating with unprecedented low interest rates.

Interest rates won’t stay this low forever. At some point they are likely to start rising. The rewards for shareholders could be considerable. HSBC said this week that if interest rates rose by 0.25% in each quarter of 2017, the group’s net interest income would rise by $1.7bn.

When rates do start to rise, the market could react fast. In the meantime, HSBC’s cost-cutting and share buybacks are helping to protect shareholder returns. I’ve no complaints.

3. The outlook is improving

The share price and valuation of big companies like HSBC is controlled by institutional investors, who buy and sell large parcels of stock.

The City has been negative on banks for some time, but the outlook appears to be improving. 2017 consensus profit forecasts for HSBC rose modestly in February, after a year of downgrades and stagnation.

The shares currently offer a yield of 6% and trade in line with their book value. A P/E of 13 isn’t unreasonable in this context, and I believe that if institutional support for the stock improves, further gains are likely over the next couple of years.

I won’t be selling my HSBC stock, and would consider buying more at current prices.

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Roland Head owns shares of HSBC Holdings. 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.