It’s not hard to find cheap dividend stocks at the moment. Within the FTSE 100 and FTSE 250 indexes, there are tons of bargain basement shares with high yields.
Here, I’m going to highlight a blue-chip FTSE 100 stock that trades on a price-to-earnings (P/E) ratio of less than seven and sports a fantastic dividend yield. I’m tempted to buy it for my portfolio.
A global banking giant
The stock in focus today is HSBC (LSE: HSBA). It’s one of the world’s largest banks with 41m customers across 60 countries and territories. It’s also one of the largest companies in the FTSE 100. At today’s share price of 660p, the company has a market value of £121bn.
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Now, bank stocks don’t always turn out to be good investments. That’s because banking’s a cyclical industry that has its ups and downs.
But I like HSBC’s long-term strategy. It’s focusing on areas of banking that are capable of generating high returns in the future such as Asia and wealth management.
It believes that by focusing on these areas, it can reach mid-single-digit revenue growth in the medium to long term. It aims for a higher proportion of revenue coming from fee and insurance income (instead of interest).
Undervalued?
The stock looks cheap right now. At present, analysts expect HSBC to generate earnings per share of 127 cents this year (about 96.2p). So at the current share price, we have a P/E ratio of 6.9.
That strikes me as low. For reference, Lloyds currently trades on a P/E ratio of about 8.8. And I think this is a better bank than Lloyds with more long-term growth potential.
It seems analysts agree the shares are undervalued. Currently, the median share price target for HSBC’s 807p. That’s about 20% above the current share price.
It’s worth pointing out however, that the stock hasn’t traded above 800p in the last 10 years. So there’s no guarantee it’s going to get there.
Big dividends
As for the dividend, it’s attractive. The 2024 dividend forecast for HSBC’s 81.4 cents. But this includes a special dividend that’s already been paid out.
I think it’s better to look at the forecast for 2025 which is 63.4 cents. That’s a yield of about 7.3% at today’s share price and exchange rate, which isn’t bad at all.
The bank’s buying back its own shares too. Buybacks are another form of shareholder returns and they can boost earnings per share over time (potentially increasing a company’s share price).
Of course, dividends and buybacks are never guaranteed. Looking ahead, the bank’s new CEO could have different ideas on how to distribute capital.
What’s the catch?
So the stock’s dirt cheap. And there’s a huge dividend yield on offer. What’s the catch? Well, as I mentioned above, banking’s cyclical. So there’s a chance that HSBC’s profits could take a hit in the years ahead if the global economy slows down.
One thing worth noting here is that HSBC has a lot of exposure to China. And its economy and property market’s struggling right now.
Taking a long-term view though, I think this stock has a lot of potential. I believe it’s capable of generating attractive returns and is worth further research.
