HSBC’s (LSE: HSBA) share price has edged down 5% from its 3 March one-year traded high of £9.50.
It is a rare dip in the stock since its significant loss after the 2 April announcement of US tariffs. Over the past year as a whole it has gained 35%.
So, is this a good time for me to add to my stake in the banking giant on the cheap?
How strong is the underlying business?
A risk for the bank remains the bearish trend in interest rates in some of its key markets. This could reduce its net interest margin (the difference in loan and deposit rates). Indeed, its 2024 results saw this margin drop to 1.56% from 1.66% in 2023.
That said, 2024 profit before tax increased 6.5% year on year to $32.309bn (£25.66bn). This was higher than consensus analysts’ forecasts of $31.67bn.
Earnings per share increased 8.7% to $1.25, and the dividend per share rose 43% to 87 cents. On the back of these numbers, the bank announced a $2bn share buyback, which tends to support share price gains.
These solid numbers reflected a shift in HSBC’s strategy towards fee-based rather than interest-based business. This was reflected in Q1 2025’s results, which saw adjusted profit before tax increasing by $1bn to $9.8bn. The fee-based Wealth and FX, Debt, and Equity Markets divisions performed especially strongly, according to the bank.
Looking ahead, analysts forecast annual earnings growth of 6.4% to the end of 2027. And it is this that ultimately drives any business’s share price and dividends.
Are the shares a bargain?
The core part of my standard assessment of any share price is the discounted cash flow (DCF) model. This identifies where any firm’s stock price should be, based on cash flow forecasts for the underlying business.
It is independent of any other comparative valuations with other shares and offers the purest result, in my view.
The DCF is HSBC’s case shows the shares are 46% undervalued at their current price of £9.06.
Therefore, their ’fair value’ is £16.78.
A big bonus yield
The bank paid 87 cents (65p equivalent) in dividends last year, giving a current yield of 7.2%. However, 16p of this was a special dividend, which might not recur. Without this included, the dividend is 49p, giving a yield of 5.4%.
By comparison, the average yield of the FTSE 100 is just 3.5% at present.
Consensus analysts’ projections are that HSBC’s dividend will end this year at the same 49p. But next year, it is predicted to rise to 51.5p, and in 2027 to 56.5p.
These would generate respective yields of 5.7% and 6.2%.
Consequently, investors considering a £10,000 holding in the bank could make £7,139 in dividends after 10 years. After 30 years, this could rise to £40,348.
These figures are based on the current 5.4% yield, with no forecast increases included. They also factor in the dividends being reinvested back into the stock (‘dividend compounding’). And they assume the group continues to do well and sticks to its current dividend strategy, none of which is guaranteed.
Will I buy more of the stock?
The bank’s solid earnings growth forecasts should push the share price and dividend higher in the years to come.
Consequently, I will buy more of the shares very shortly.
