Why the lower HSBC share price could be a great buy for me

Tom Rodgers is eyeing the HSBC share price today, as dividends return and profits soar. He says this FTSE 100 stock could be his next buy.

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Scene depicting the City of London, home of the FTSE 100

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The HSBC (LSE:HSBA) share price has fallen around 15% since the end of May 2021. Today’s price could make the FTSE 100 bank a great addition to my portfolio given its surging profits and dividend yield. That’s the conclusion I’ve come to, and I’ll tell you why. 

HSBC said in first-half results released on 2 August that its profits had doubled to $5.5bn. 

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The bank has also reinstated the interim dividend it was forced to shelve during the coronavirus pandemic. At 7 cents a share (around 5p) given today’s HSBC share price, it’s a yield of around 2.7%. That’s not massive. But the bank’s CFO Ewen Stevenson said this week the multinational was “well placed to fund future growth and step up capital returns”.

More for me

In other words, HSBC is planning to improve its per-share dividend in future. Back in 2018, HSBC offered shareholders 51 cent per share (36.6p) annual payout.

If it could return to those halcyon days? Based on today’s much lower HSBC share price, it would mean a whopping dividend yield of close to 9%. This might well be wishful thinking given the uncertain state of the economy. But half that amount? Anything close to 5% in the medium term would be a great portfolio boost for me. 

Analysts at Credit Suisse added this week that they expect HBSC to start $1bn of share buybacks. That’s when a business buys its own shares in the hope of improving the value of those held by other shareholders. 

So for the first time in a long while, being a big bank shareholder seems a happy place to be. 

Speaking to Bloomberg, Stevenson added the bank had seen strong growth in its loans division. Long-term growth here could improve the HSBC share price.

HSBC share price inflation?

Some economists predict that world economies are heading for a period of stagflation. That’s when prices for food, fuel, medicines and other household staples rise while the economy fails to grow. This could be a major issue for the HSBC share price.

If that happens, it’s likely businesses and individuals will be more fearful of taking out loans in the amounts HSBC needs to keep its profits up. 

Because the bank is diversified across the globe — certainly more so than the likes of UK-focused Lloyds Bank — it is more insulated to economic shocks in one region.

That said, HSBC creates most of its annual revenues from Asian centres like China and Singapore. A surprise economic downturn there could play poorly for shareholders.

What to watch

Other issues could weigh on the HSBC share price. First of all, throughout the Covid-19 lockdowns, many households managed to save up more cash that usual. I certainly did, because my usual costly habits of pubs, golf clubs, and garden centres were all shuttered. 

At the same time, banks like HSBC set aside mountains of cash to cover expected bad debts, which never came. 

Managers being able to remove those debt limits has contributed to the stupendously high bank earnings we’ve seen this financial quarter.

And of course, there is a risk that we won’t see these kinds of profits again any time soon. HSBC won’t be able to rely on such a perfect storm of economic conditions again. It’s something I’ll watch very closely if I decide to buy shares here. 

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Tom Rodgers has no position in HSBC. 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.

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 considered, so you should consider taking independent financial advice.

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