The HSBC (LSE: HSBA) share price has a respectable one-year return of 17%. This doesn’t tell the full story though, as the stock still hasn’t recovered from the sell-off in March 2020. You see, before Covid hit, the share price almost touched 600p. Today, the price has only just passed through 480p, but at least it’s made a strong start to 2022.
The shares still look cheap, even after the 7.5% rally so far in January. Let’s dig a bit deeper to see if the shares are a buy for my portfolio.
The bull case
I should start with the valuation. The forward price-to-earnings ratio for HSBC shares is a touch over nine. This looks extremely cheap to me. However, I need to consider the potential for growth before I make a buy decision.
The outlook statement was positive when the company delivered third-quarter results. HSBC said its revenue expectations are improving, with fees growing across most of its businesses. Capturing this upbeat outlook is an estimate for earnings per share (EPS) to grow 148% in 2021. I have to keep in mind this huge growth is from a much lower starting point than in 2020 when EPS crashed over 50% due to the pandemic. Nevertheless, HSBC is still on track to achieve EPS of 70.7 cents this year, which is greater than pre-pandemic earnings.
I also think the income characteristics of HSBC shares are attractive. The current dividend yield forecast for 2022 is a punchy 4.3%. The dividend is expected to grow 12% this year, and a further 21% in 2023. What’s more, HSBC said recently it’s now well placed to step up capital returns to shareholders. Taking into account its growth opportunities, the company said it can now start buying back its shares up to a value of $2bn. A growing dividend and a share buyback programme should lead to attractive returns for my portfolio if I buy the shares.
The bear case
HSBC is a global bank, with key operations in Asia and Europe. The company said all regions were profitable in the third quarter, with Asia contributing $3.3bn of profit before tax, and HSBC UK recording $1.5bn. Therefore, Asia represents a significant proportion of business to HSBC.
Why this matters is because of the ongoing issues with Evergrande, a large property developer in China. Evergrande is struggling to repay its debt right now, and has already defaulted on its interest payments. HSBC may come under pressure from Evergrande’s debt woes, and any further deterioration in China’s property sector.
There’s also the risk of Covid escalating again. The Omicron strain is spreading globally right now, with further strains of the virus still a possibility. HSBC’s business was heavily impacted at the start of the pandemic, so there’s always a risk of a repeat. Surging inflation may also dampen consumer sentiment and reduce spending, which could also weigh on the bank’s lending businesses.
Should I buy at this HSBC share price?
I think HSBC shares look good at the current price. The valuation is low enough to take into account the risks ahead in my view. The dividend yield is also attractive, and the upcoming share buyback is another positive sign. So for now, I think HSBC is a buy for my portfolio.
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Dan Appleby 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.