I’m forever on the hunt for FTSE 100 stocks that will pay me a stellar rate of passive income and Asia-focused bank HSBC Holdings (LSE: HSBA) has caught my eye. Today, it offers a magnificent trailing yield of 7.55%. That’s roughly double the UK blue-chip average of 3.78%. The downside is that it brings with it one huge risk. I’ll come to that in a moment.
Following a bumper 2023, when reported profit before tax jumped 78% to $30.3bn, HSBC has been throwing money at shareholders. Its full-year dividend of 60 US cents per share was the highest since just before the financial crisis struck in 2008.
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2023 share buybacks totalled $7bn. It’s since followed that with $2bn in the first quarter of 2024 and another $3bn for Q2.
HSBC lavishes shareholders
The forecast yield for 2024 is now a staggering 9.94%. That may retreat but the forecast yield of 7.69% in 2025 isn’t too shabby.
Analysts reckon that HSBC will pay a dividend per share of 62 cents in 2025. That’s around 48.62p in sterling terms.
To hit my £100 monthly income target from this one stock, I’d have to buy 2,468 HSBC shares. At today’s price of 647p per share, that would cost me £15,968. That’s a pretty big purchase. It would eat up most of this year’s ISA allowance. Should I go for it?
2024 interim results published on 31 July showed first-half profit after tax down 2% $17.7bn, while revenues crept up just 1% to $37.3bn. While hardly spectacular, this follows a bumper year.
Outgoing group CEO Noel Quinn hailed “another strong profit performance”, boosted by its investment in wealth management, which is delivering higher, diversified revenues. Quinn anticipates a “mid-teens return on average tangible equity in 2025”.
Given all the money rolling into HSBC’s coffers (then flowing into shareholders’ accounts), I’d have expected more share price growth. Yet it’s up just 4.13% over the last year. That’s below the FTSE 100 average of 10.05%.
The HSBC share price looks astonishingly cheap with an ultra-low forecast P/E of just 6.44 times earnings. That looks like it should be belong to a company that’s losing money, rather than making it hand over fist.
Blue-chip stock pick
This may partly reflect the risk I mentioned earlier, which comes in two parts. HSBC’s Chinese operations are exposed to the country’s ailing economy, not that this appears to have harmed revenues or profits much.
More worryingly, this puts it on the front line of the accelerating trade war with the West, that could ultimately force HSBC to pick a side. Tensions could intensify if Republican candidate Donald Trump wins November’s presidential election.
Falling interest rates may also hurt as this will squeeze net interest margins, the difference between what banks pay savers and charge borrowers.
I already have a big holding in Lloyds Banking Group. However, the UK-focused bank has a very different market and risk profile. HSBC could complement it nicely. I can’t afford to invest £15k in HSBC and to be honest, that geopolitical risk scares me. Despite the fabulous second income stream on offer, I won’t buy it today.
