While the FTSE 100 has fallen by a whopping 10% over the last three months, shares in HSBC (LSE: HSBA) (NYSE: HSBC.US) have risen by 1.5%. Indeed, investor sentiment in the bank has improved significantly and it could be set to increase further. Here’s why.
Income Potential
A key attraction of HSBC is its income prospects. For starters, it has remained hugely profitable throughout the credit crunch which, when you consider that it was one of the worst periods in the history of banking, is a staggering achievement. Furthermore, HSBC did not require a government bailout and has instead been able to maintain a relatively strong tier 1 capital ratio and cost:income ratio throughout the last few years.
With regards to making dividend payments, stability matters. It’s of little use buying shares in a company with a great yield only for dividends to be slashed when things turn sour for the sector. In this respect, HSBC also impresses. It has increased dividends per share in each of the last four years and, with shares in the bank now yielding 5.1%, they are very attractive as an income play.
However, HSBC’s yield could breach 6% within two years (assuming a constant share price). Indeed, next year the bank is set to increase dividends per share at a rapid rate of 8.1%. That’s almost seven times the current rate of inflation and shows that HSBC remains committed to a very shareholder-friendly stance.
Furthermore, if HSBC were to replicate such a growth rate in the following year, it would mean that shares trade on a yield of just over 6%. This is highly achievable, since it would mean a dividend payout ratio of just 64%, which assumes no profit growth in 2016 (a conservative assumption).
Looking Ahead
So, with a clear and very realistic path to a 6% yield in 2016, HSBC remains a hugely attractive income play. It also offer fantastic growth prospects from its exposure to Asian economies, most of which are demanding a greater number of loans through which to finance their economic development and expansion.
In addition, with shares in HSBC trading on a price to earnings (P/E) ratio of just 11.3, they seem to offer superb value for money. For long term investors, HSBC could provide the perfect mix of growth, value and income potential.
