HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US) recently posted its fattest profits since the financial crisis, and markets celebrated by trashing its share price 5%. Welcome to the crazy world of FTSE 100 investing. Its share price is down 13% over the past 12 months, against a 6% rise for the index, however, so it is clearly doing something wrong.
With investors fretting over a potential emerging markets meltdown, HSBC only added to their worries with its full-year results for 2013. Pre-tax profits rose 9% to $22.6 billion, but markets had expected another $2 billion on top of that. A 17% drop in Latin American earnings to $1.97 billion did some damage. Management sounded a little nervous itself, predicting greater volatility and choppy markets in 2014, ramping up the fear factor.
Gulliver’s travails
There was still plenty of good news in there. Underlying profits rose 41% to $21.6 billion, for example. HSBC has been cutting costs, trimming staff 10% to 254,000 over three years. This may leave a bad taste, with chief executive Stuart Gulliver, who earned $8 million in salary and bonuses last year, leading a campaign against the new EU bonus, but that’s banking for you. But there’s one thing about HSBC that’s the really grabs my eye.
Last year, HSBC paid more than half its earnings as dividends. Better still, its strong capital position leaves it nicely placed to continue rewarding shareholders. HSBC boasts a Core tier 1 ratio of 13.6%, marginally ahead of Barclays at 13.2%, and notably stronger than the 10.9% cushion at RBS and 10.3% at Lloyds Banking Group. HSBC paid a total dividend of 49 cents last year, up 9% on 2012. It is on a forecast yield of 5.3% in 2014, which is forecast to rise to a whopping 5.8% next year. If you buy the stock now, and sit tight, the income will come streaming in.
In return, you may have to endure a bit more share price volatility. Mis-selling accusations and regulatory interventions are a constant menace. Bank levies keep rising. China hangs in the balance (although HSBC still reckons it will grow 7.4% this year). The emerging market growth story could still end messily. But my position on banks hasn’t changed. In the long run, they’re where the money is.
Bad banks, good investment
HSBC is where I would start. First, its dividend is streets ahead of Barclays, which yields 2.6%, while Lloyds and RBS aren’t even in the game. Its hefty emerging markets exposure is troubling in the short term, but in the longer run, management predicts trading capital flows between Asia, the Middle East and Latin America could increase tenfold by 2050, and HSBC will be in the thick of it.
Earnings per share are forecast to rise 18% this year and 10% in 2015. Better still, thanks to recent share price dip, you can buy HSBC on a forecast valuation 10.6 times earnings for December 2014. That’s a fair price to pay for a dividend machine.
