A number of FTSE 100 shares look potentially cheap to me.
Take HSBC (LSE: HSBA) as an example. It has soared 207% from a 2020 low. But it still trades on a price-to-earnings ratio of just 9 – and offers a 5.5% dividend yield to boot.
Might it be the biggest bargain on the blue-chip index right now?
International footprint and proven business model
The bank has been reshaping itself in recent years, exiting certain markets. It continues to be a sizeable force in key markets, notably Hong Kong and the UK.
Having already sold off various businesses, HSBC continues to reshape itself around a couple of centres of gravity, in Asia and the UK. That adds geopolitical risk.
On the plus side, it offers the benefit of diversification and allows the experienced, longstanding bank to benefit from economic growth opportunities in one region even if the other is performing less strongly.
HSBC is not the most exciting business, but as an investor I like its strong brand, proven business model, large customer base and significant ongoing cash generation potential. That last point can help support the dividend.
A 5.5% yield is already well above the FTSE 100 average, but some HSBC shareholders are doing better. After all, those who bought back at the 2020 low I mentioned would now be earning a dividend yield close to 17%.
The share price could be good value, but carries risks
While that P/E ratio may look low, it is pretty much par for the course among London-listed banks. It is lower than the 11 of Barclays but in line with both Lloyds and Natwest.
That points to a concern I think some investors (including myself) have about the sector. While earnings have been strong in the past several years, a weak and uncertain global economy could mean higher loan defaults in coming years.
If that happens, I would expect banks including HSBC to take a hit to their profits.
If the global economy steps up a gear then banks may come to look undervalued at today’s prices. That could mean a higher share price for HSBC several years from now.
However, the risk environment does not make me feel comfortable investing in banks at the moment.
I doubt this is the FTSE 100’s best bargain share
So, I will not be investing in HSBC.
Its yield is attractive, but it is well below that currently offered by other FTSE 100 shares I own such as M&G and Legal & General.
As for valuation, it looks fairly cheap but not more so than some rivals. As to whether that appearance of cheapness is in fact correct, time will tell.
If banks like HSBC encounter choppier waters, their current valuations may not be cheap despite trading on a single digit P/E ratio. I prefer more margin of safety.
