The Motley Fool

A Practical Analysis Of HSBC Holdings Plc’s Dividend

The ability to calculate the reliability of dividends is absolutely crucial for investors, not only for evaluating the income generated from your portfolio, but also to avoid a share-price collapse from stocks where payouts are slashed.

There are a variety of ways to judge future dividends, and today I am looking at HSBC Holdings (LSE: HSBA) (NYSE: HBC.US) to see whether the firm looks a safe bet to produce dependable payouts.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Forward dividend cover

Forward dividend cover is one of the most simple ways to evaluate future payouts, as the ratio reveals how many times the projected dividend per share is covered by earnings per share. It can be calculated using the following formula:

Forward earnings per share ÷ forward dividend per share

HSBC is expected to produce a dividend of 33.8p per share in 2013, with earnings per share during this period anticipated to come in at 65.3p. This provides dividend cover of 1.9 times prospective earnings, just below the safety threshold of 2 times.

Free cash flow

Free cash flow is essentially how much cash has been generated after all costs and can often differ from reported profits. Theoretically, a company generating shedloads of cash is in a better position to reward stakeholders with plump dividends. The figure can be calculated by the following calculation:

Operating profit + depreciation & amortisation – tax – capital expenditure – working capital increase

HSBC’s free cash flow came in at $11.86bn in 2012, a decent result but down from $14.51bn in 2011. Operating profit fell to $17.09bn from $18.61bn, while depreciation and amortisation also dropped to $2.53bn from $3.14bn. Additionally, the company’s tax bill edged higher, although falling capex costs helped lower the cash flow fall — this moved to $2.28bn from $3.14bn in 2011.

Financial gearing

This ratio is used to gauge the level debt a company carries. Simply put, the higher the amount, the more difficult it may be to generate lucrative dividends for shareholders. It can be calculated using the following calculation:

Short- and long-term debts + pension liabilities – cash & cash equivalents

___________________________________________________________            x 100

                                      Shareholder funds

HSBC’s gearing ratio came in at a negative reading of 177.7% in 2012, although this was down from 202.7% in 2011. Retirement liabilities edged to $3.9bn from $3.7bn, while cash and cash equivalents dropped to $315.3bn from $325.4bn.

Buybacks and other spare cash

Compared to numerous other banking plays, who are having to bolster their capital reserves in line with regulatory requirements, HSBC is in relatively good shape. Indeed, the bank currently sports a core tier 1 capital ratio of 12.7%. This is far north of the requirement to hold reserves of at least 7% of its risk-weighted assets.

Still, investors should be mindful that the company produces more than 90% of revenues from the Asia-Pacific region, and that increasing signs of economic cooling in China could weigh heavily on the firm. Liberum Capital estimates that HSBC could experience a $32bn capital deficit in the event of a ‘hard landing’.

Bank on dividend growth to keep on rolling

Still, I believe that HSBC’s pan global operations should deliver reliable earnings growth, in turn enhancing its qualities for those seeking attractive investment income. The bank has steadily rebuilt full-year payouts following the aftermath of the 2008/2009 banking crisis, and I think the firm’s balance sheet is strong enough to keep this trend in tact.

City brokers have pencilled in a dividend yield of 4.6% in 2013, far above the 3.3% prospective average for the broader FTSE 100. I believe that the bank is a great pick for those seeking both lucrative and secure dividend streams.

Multiply your investment income with the Fool

So if you are looking for FTSE 100 dividend winners like HSBC Holdings to really jump start your investment income, then you should check out this brand new and exclusive report covering a multitude of other premium payers right now.

Our “5 Dividend Winners To Retire On” wealth report highlights a selection of tasty stocks with an excellent record of providing juicy shareholder returns. Among our picks are top retail, pharmaceutical and utilities plays which we are convinced should continue to provide red-hot dividends. Click here to download the report — it’s 100% free and comes with no obligation.

> Royston does not own shares in HSBC Holdings.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.