When the market outlook is looking tough, the tough go shopping for shares. Why? Because top companies are available at discount prices while their yields can go through the roof. FTSE 100 giants HSBC Holdings (LSE: HSBA) and Vodafone Group (LSE: VOD) would be high on my shopping list right now, because they fulfil these two conditions perfectly.
HSBC is trading 8% lower than it was just one month ago, while Vodafone is down 13%. In both cases, the slippage is due to wider market concerns rather than individual company problems.
In fact, HSBC got a slight lift in January after agreeing a relatively modest $101.5m financial settlement with the US Department of Justice to resolve its investigation into the bank’s foreign exchange division. Investigatory penalties are a constant risk when investing in banks, but that’s now one less to worry about.
HSBC has massive China exposure and Asian markets are selling off just as enthusiastically as the rest. If the Chinese credit bubble finally bursts – we’ve been waiting for years – this would indirectly hit HSBC and Standard Chartered as well. However, the long-term Asia growth story still looks strong to me, due to positive demographics, the growing middle-class, improved corporate governance, and opportunities for catch-up with the West. HSBC could be a relatively safe way to tap into that story.
My Foolish colleague Royston Wild described investing in HSBC as a no-brainer. City analysts are positive, forecasting 4% earnings per share (EPS) growth in calendar year 2018, and another 5% in 2019. The forecast yield is 5.3% while its price-to-book value is 1.2. There are still risks in buying HSBC, but with massive potential rewards. If you don’t want to buy today, add it to your watchlist. Then wait for the next Asia sell-off… It will come.
Mobile phone and broadband operator Vodafone has been falling despite recently reporting that it is on track to meet forecasts for annual profit after Q3 trading was in line with expectations. Hopes are growing of a European hook-up with Liberty Global that could boost Vodafone’s cashflow and earnings. The stock is nonetheless sharply down in recent weeks, with the global crash mostly to blame. Not entirely, though.
Broker Macquarie warned last week that the all-important Vodafone dividend is in peril, and could be cut. Now that’s one concern you do have to take into account. Dividend cover has been wafer thin for quite some time. The current forecast yield is a juicy 6.5%, one of the best on the FTSE 100, but with cover of just 0.7. As my colleague Jack Tang points out here, Vodafone has not covered its dividend from earnings for the past three years, and will not do so until 2020.
However, its growth prospects remain strong, with forecast EPS of 24% in the year to 31 March, followed by 11% and 23%. Vodafone’s forecast valuation still looks a little toppy at 21.5 times earnings, despite recent slippage. But again, one for your watchlist, ready for the next dip.
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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.