HSBC (LSE:HSBA) is one of the UK market's biggest companies. But how have long-term investors fared?
Some of the biggest companies in the FTSE 100 (UKX) run schemes where investors can take dividends in the form of new shares instead of cash. This is known as a Dividend Reinvestment Plan (DRIP), or 'scrip' dividends.
If the company in question pays a large and increasing dividend, such reinvestment can quickly compound the size of your shareholding higher.
Using dividend data on HSBC (LSE: HSBA), you can see how the income produced by this titan bank has made dedicated shareholders richer.
| Shares owned | Dividend year | Dividend per share (p) | Shares purchased by DRIP scheme | New holding |
|---|
| 1,000 | 2003 | 34.5 | 40 | 1,040 |
| 1,040 | 2004 | 35.4 | 42 | 1,082 |
| 1,082 | 2005 | 40.3 | 46 | 1,128 |
| 1,128 | 2006 | 41.9 | 50 | 1,178 |
| 1,178 | 2007 | 45.1 | 61 | 1,239 |
| 1,239 | 2008 | 38.3 | 301* | 1,540 |
| 1,540 | 2009 | 21.3 | 48 | 1,588 |
| 1,588 | 2010 | 22.7 | 55 | 1,643 |
| 1,643 | 2011 | 26.0 | 77 | 1,720 |
| 1,720 | 2012** | 16.9 | 49 | 1,769 |
* assuming rights issue was passed, rights were sold and invested in shares
** only three of four dividend payments included
My figures are based on someone that owned 1,000 HSBC shares 10 years ago. Here is how dividend reinvestment has rewarded the company's investors.
Just over 10 years ago, shares in HSBC were 807p each. If an investor at the time bought 1,000 shares and kept reinvesting the dividends, they would today own 1,769 shares in the bank. Using today's share price, an initial outlay of £8,070 would now be worth £11,375.
With $0.44 of dividends expected for 2012, that initial £8,070 investment is expected to yield £477 in dividends this year.
The HSBC story demonstrates what can happen to a long-term DRIP investment when the dividend is cut. HSBC cut its payout in 2008 and again in 2009. The result was that the 2010 payout was less than half of the 2006 figure. Although HSBC fared better than most other banks in the financial crisis, returns for long-term investors were badly damaged.
There are some grounds for optimism. On a forward price-to-earnings ratio if 11.5, HSBC is currently undervalued compared with the average FTSE 100 share. Although the dividend was cut during the financial crisis, the resilience that HSBC has since demonstrated makes me think a much higher rating is deserved. After all, if HSBC was able to trade profitably throughout the credit crunch, what would it take to force the bank into reporting a loss?
HSBC is forecast to report a small decline in profits for 2012. This is expected to be followed by a 14.3% rise in 2013. The dividend is forecast to rise for two successive years. An increase of 5.2% is expected for 2012, followed by a 10.1% increase in 2013.
I believe that the market will begin re-rating bank shares as they put the crisis behind them. If I am correct, then HSBC looks ripe for an upgrade.
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> David does not own shares in HSBC.
