A £20,000 lump sum invested in HSBC (LSE: HSBA) shares two years ago would today be worth £45,864, with dividends included. That is a gain of £22,321 on the share price, plus a further £3,543 in dividends, giving a total return of 129%!
One risk to the bank is the intense competition that may squeeze its margins. Another is a sustained global recession, which could reduce its customer base.
But HSBC’s profits look set to rise on two key factors. First, interest rates in several of its key global locations continue to supercharge its net interest income. Second, its Asian operations are delivering faster loan growth, stronger fee income and richer margins. On the other side of the accounts, ongoing cost cuts have resulted in leaner, more efficient operations.
So, what sort of gains could investors be looking at here?
More share price gains?
A discounted cash flow analysis (including an assumed 8.3% discount rate) shows the shares are 37% undervalued at their current £13.63 price.
Some analysts’ DCF modelling is more bearish than mine, depending on the variables used. However, based on my DCF assumptions, this undervaluation implies a fair value for the stock of £21.63 — significantly higher than where they trade now.
Given the relationship between price and fair value, this suggests a potentially terrific buying opportunity today, if those DCF assumptions hold good.
And because share prices tend to converge towards their fair value in the long run, this price-to-valuation gap suggests a potentially superb buying opportunity to consider now if those DCF assumptions prove accurate.
Rising dividend payouts?
The dividend story looks just as compelling to me. HSBC is already one of the FTSE 100’s biggest income payers, and its rising profits, disciplined capital allocation and hefty surplus capital position give it plenty of firepower to keep lifting the payout.
Analysts forecast its dividend yield will be 4.6% this year, 5% next year, and 5.4% in 2028. By contrast, the average for the FTSE 100 is just 3.1%.
So, investors considering a £20,000 holding in the bank (the same as mine) would make £14,279 in dividends after 10 years. And after 30 years — the end of the standard investment cycle for long-term investors — this would rise to £80,695.
These numbers assume the forecast 5.4% yield as an average, although this can go up and down. It also factors in the dividends being reinvested back into the stock to harness the turbocharging power of ‘dividend compounding’.
By the end of 30 years, the holding’s total value would be £100,695. And this would pay an annual income from dividends alone of £5,438.
My investment view
Consensus analysts’ forecasts point to average annual earnings growth of 10.2% for HSBC over the medium term. This is ultimately what powers any firm’s share price and dividend higher over time.
The projection looks well-supported by its full-year 2025 results, released on 25 February. Adjusted profit before tax increased by $2.4bn (£1.78bn) year on year to $36.6bn.
And management raised its return on tangible equity target — a key profitability benchmark for banks — to 17%+ through to end-2028. The previous target was mid-teens for the three years through to end-2027.
Given all these factors, I will be buying more of the stock very soon.
