Does HSBC Holdings plc Pass My Triple-Yield Test?


Like most private investors, I drip-feed money from my earnings into my investment account each month. To stay fully invested, I need to make regular purchases, regardless of the market’s latest gyrations.

However, the FTSE’s gains mean that the wider market is no longer cheap, and it’s getting harder to find shares that meet my criteria for affordability.

In this article, I’m going to run my investing eye over HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US).

The triple yield test

Today’s low cash saving and government bond rates mean that shares have become some of the most attractive income-bearing investments available.

To gauge the affordability of a banking share for my income portfolio, I like to look at three key figures –the dividend and earnings yield, and the bank’s return on equity. I call this my triple yield test:

HSBC Holdings Value
Current share price 628p
Dividend yield 4.9%
Earnings yield 8.0%
Return on equity 10.3%
FTSE 100 average dividend yield 3.0%
FTSE 100 earnings yield 6.0%
Instant access cash savings rate 1.5%
UK 10yr govt bond yield 2.8%

A share’s earnings yield is simply the inverse of its P/E ratio, and makes it easier to compare a company’s earnings with its dividend yield. HSBC’s earnings yield of 8.0% is above the FTSE 100 average, and looks undemanding, with the bank’s shares trading on a P/E ratio of 12.5.

Dividend quality?

HSBC’s income credentials are also strong; the bank’s 4.9% dividend yield is 63% higher than the FTSE 100 average, despite HSBC’s payout being cut by 20% in 2008 and by 46% in 2009. HSBC’s return on equity of 10.3% suggests that the dividend is backed by real profits, too.

Although this year’s expected full-year dividend of $0.51 remains below the $0.81 received by shareholders in 2007, HSBC’s dividend has risen at an average rate of nearly 11% per year since 2009, and is expected to increase by a further 10% in 2014.

Is HSBC a buy?

HSBC has a market capitalisation of £117bn, operates in 80 countries, and has around 55 million customers. At the last count, it had around £156bn in cash and cash equivalents. The sheer scale of the bank’s operations is hard to comprehend.

In recognition of this, HSBC has been divesting non-core assets such as its Chinese insurance business over the last year, and is focused on cost-cutting and growing its business in selected core areas, with a view to improving profits and shareholder returns.

As a shareholder, I support these changes, and view the 18% fall in the bank’s share price from its 52-week high of 772p as a good buying opportunity.

What are HSBC shares worth?

Valuing banking shares is never easy, but there are a number of key metrics that enable investors to make meaningful comparisons between banks. This is an area that is covered in more detail in "The Fool's Guide To Investing In Banks", which contains details of six key valuation metrics for each of the five banks in the FTSE 100.

This exclusive special report makes it clear that HSBC has several key competitive advantages over its UK-focused peers. To download your free copy of this important report, simply click here now.

> Roland owns shares in HSBC Holdings.