Ever since HSBC (LSE: HSBA) (NYSE: HSBC.US) announced its first-quarter results, the City has been voicing concerns over the sustainability of the company’s dividend payout.
In particular, during the first three months of the year HSBC’s pre-tax profit dropped 20% year on year, while revenues fell 8% to $15.9bn. Now, this is a problem because HSBC’s management has stated that the company’s dividend payout ratio will not exceed 60% of earnings.
However, the payout ratio hit 58% during 2013, so, a 20% slump in profits is bound to put the dividend under pressure.
Still, HSBC’s falling profits are considered by most to be a good thing as the bank has been strengthening its balance sheet and improving relations with customers.
Nevertheless, the City believes that falling profits as well as other headwinds will combine and the bank will be forced to cut its payout.
Emerging markets
HSBC’s troubles stem from emerging markets, Asia in particular. HSBC generates more than half of its profits within emerging markets and as economic headwinds, especially within China, start to pick up, analysts are worried that HSBC’s profits will continue to slide.
But it’s not just China that is causing trouble for HSBC. The bank has recently pulled out of Bahrain, Jordan and Lebanon as high costs and competition saps profitability. Further, after being fined for a money-laundering scandal within Mexico, HSBC has closed some Latin American operations.
All these closures have dented sales and profits.
Management is committed
Still, while the City remains sceptical about HSBC’s ability to sustain its current dividend payout, the bank’s management has dug in its heals, insisting that the payout is here to stay.
According to CEO, Stuart Gulliver; “…we do not see any particular significant change beyond our experience over the last four years…” implying that the bank will continue as it has done during past four years. And the past four years have been a period of consistent dividend out performance for HSBC, as the bank has raised both the absolute amount of dividend as well as its payout ratio.
Star fund manager Neil Woodford is also impressed with the bank and its payout. The star fund manager has been buying HSBC for his £3.7bn mandate with wealth manager, St James’s Place. HSBC must be doing something right as Woodford is famously sceptical of the banking sector.
What’s more, HSBC is well capitalised with an industry-leading Tier one capital ratio of 13.3% and improving balance sheet. So, unlike many of its peers HSBC is unlikely to require additional capital, which would put management under pressure to cut the dividend.
However, despite these views from Woodford and HSBC’s management, the City believes that HSBC will pay a dividend of $0.49 per share this year but will cut the payout 4% to $0.47 for 2015.
Foolish summary
All in all, as HSBC’s profit slides it is reasonable to suggest that the bank’s dividend payout will come under pressure. That said, as the current payout is only 58% of earnings and HSBC’s management is committed to the payout, it would seem as if, for the time being, the payout is here to stay.
