Is HSBC Holdings plc An Annuity Alternative?

The annuity market is expected to shrink by up to £7.6bn per year — and HSBC Holdings plc (LON:GSK) could be one of the main targets for this cash.

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Annuity giant Legal & General expects the UK annuity market to halve in size, following the changes announced to pension rules in last week’s Budget.

Adrian Boulding, L&G’s pension strategy director, told the Financial Times that the firm expects the UK annuity market to shrink from around £12bn per year to between £4.4bn and £6bn a year — leaving up to £7.6bn per year sloshing around the UK economy, looking for a new home.

In my view, George Osborne’s decision to liberate pension funds could end up giving the stock market a boost — in particular, large cap dividend stocks like HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US).

Global banking dividends

Even HSBC was forced to halve its dividend during the financial crisis, but it’s worth remembering that until 2008, big banks had always been seen as a reliable source of dividend income, something I expect will continue to be true, over the long term.

HSBCHSBC’s three core locations are Shanghai, Hong Kong, and London, making it perfectly positioned to profit from the long-term modernisation and emergence of China’s $8.3tn economy.

Alongside this, HSBC also has operations throughout Asia, in Latin America and in the Middle East and North Africa — all regions likely to deliver long-term growth over the next few decades.

In my view, no other UK bank will be able to profit from global economic trends as well as HSBC, over the coming years.

Rock-solid finances

The financial strength of Standard Chartered has been questioned in recent months, while Barclays was forced to resort to a rights issue to strengthen its balance sheet last year. In contrast, no one has questioned HSBC’s financial strength — and with good reason.

When the financial crisis took hold in 2008, HSBC had $58bn in cash on its balance sheet. By the end of 2013, that figure had increased to $172bn, highlighting the bank’s amazing ability to generate cash.

Over the same period, HSBC’s operating profit has risen by an average of 19% per year — from $9.3bn in 2008, to $22.6bn in 2013 — as it has trimmed costs, and refocused its operations on its core, most profitable businesses.

Bargain valuation

HSBC currently trades on a 2014 forecast P/E of just 10.6, and offers a prospective yield of 5.3% for the year ahead. In my view, this is extremely cheap, and fails to price in any of HSBC’s long-term growth prospects.

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.

Roland owns shares in HSBC Holdings, Barclays and Standard Chartered, but does not own shares in Legal & General. The Motley Fool owns shares in Standard Chartered.

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