Is the HSBC share price a FTSE 100 bargain, or should I buy this 11%-yielder?

Roland Head highlights the income appeal of FTSE 100 (INDEXFTSE:UKX) heavyweight HSBC Holdings plc (LON:HSBA).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Today, I’m hunting for high-yield stocks with the potential to provide a reliable dividend income.

My first choice is FTSE 100 banking giant HSBC Holdings (LSE: HSBA). Although the bank’s operations are global, around 75% of its profit comes from Asia. London forms the other end of a chain, linking western investors with Asian markets for more than 150 years.

In my view, Brexit risks are fairly minimal here. Unlike UK-focused banks such as Lloyds, HSBC’s profits don’t depend on the UK housing market (mortgages) or consumer spending (credit cards). Nor is the group heavily dependent on trading between the UK and the EU.

Trading results for the first nine months of 2018 highlighted strong conditions in Asian markets. Adjusted pre-tax profit of $18.3bn was 12% higher than for the same period last year. Most of this was driven by strong conditions in Asia, where pre-tax profit rose 13% to $13.8bn.

A good time to buy?

Although operating expenses also rose slightly, the group’s overall profitability has improved this year. Return on tangible equity rose to 10.1% during the first nine months of the year, compared to 9.3% for the same period last year.

For investors, I believe the stock looks affordable and fairly low-risk. HSBC shares trade at 664p at the time of writing, giving the bank a price/book ratio of 1.05, and a forecast price/earnings ratio of 11.6. An expected payout of $0.52 per share should provide a dividend yield of 6.1%.

As an income investor, I’d be happy to buy and hold HSBC at this level.

This small-cap boasts an 11% yield

My second stock is convenience store operator McColl’s Retail Group (LSE: MCLS). As I write, McColl’s share price is down by 28% to just 85p, giving the firm’s shares a forecast dividend yield of 11%.

The trigger for today’s fall was the group’s second profit warning in six months. Management said that last year’s failure of wholesaler Palmer & Harvey, and the subsequent switch to Morrisons as a primary wholesale supplier is continuing to cause “challenges.”

Unfortunately, this isn’t the retailer’s only problem. Tough competition from rivals means that the group has been forced to absorb rising costs, such as the National Living Wage. Weak sales growth means that like-for-like revenue fell by 1.4% over the 12 months to 25 November.

As a result of these pressures, McColl’s earnings, before interest, tax, depreciation and amortisation (EBTIDA), are now expected to fall by 20% to £35m this year.

Profits for the 2018/19 financial year are expected to be “no more than a modest improvement” on this year’s result.

Buy, sell or hold?

Although net debt has fallen by £142m to £100m over the last year, profits will be lower too. My sums suggest that the group’s net debt-EBITDA leverage ratio is now 2.9x. That’s well above the 2x maximum I prefer to see.

Another concern is that much of this debt reduction was only possible thanks to £25m of cash proceeds from sale and leaseback transactions. Selling freehold property in this way generates one-off cash gains, but leaves the group with rising long-term lease liabilities.

McColl’s has low profit margins and is struggling to grow. In my view, the firm’s debt levels are too high. I think a dividend cut will soon be needed. I view this as a stock to avoid.

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 Head has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings, Lloyds Banking Group, and McColl's Retail. 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.

More on Investing Articles

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

I’ll snap up shares in this growth stock in March if others don’t get there first

This Fool says shares in this growth stock are stable, full of profit, and might be undervalued. But there are…

Read more »

Rainbow foil balloon of the number two on pink background
Investing Articles

My 2 top energy investment trust picks for a passive income

I'm aiming to buy more of these investment trusts for a passive income and the reasonably stable energy sector returns…

Read more »

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings
Investing Articles

5.5% dividend yield! Shares like these could be great for my retirement

Oliver Rodzianko thinks this company with a stellar dividend yield could be very useful when looking for income from his…

Read more »

Investing Articles

Should I buy this FTSE 250 stock as it soars back to the FTSE 100?

This FTSE 250 stock has rallied following its pandemic woes. This Fool thinks now could be a good time to…

Read more »

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Investing Articles

How I’d aim to transform an empty Stocks & Shares ISA into £1m of wealth!

There's never a better time to start investing in a Stocks and Shares ISA than today. Here's how I'd aim…

Read more »

Close up of manual worker's equipment at construction site without people.
Investing Articles

Investing £14,708 in this FTSE 100 stock could earn me £1,000 per year in passive income

Is a CMA investigation into anticompetitive practices the cloud cover Stephen Wright needs to start buying shares in a FTSE…

Read more »

Investing Articles

Despite rising 152% in a year, is Rolls-Royce’s share price still a bargain?

While Rolls-Royce’s share price has shot up recently, it still looks very undervalued against its peers, and the business looks…

Read more »

Investing Articles

Could Nvidia stock be a bargain in plain sight?

Nvidia stock has surged 252% over the past 12 months, but that doesn't mean it's expensive. In fact, it may…

Read more »