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Is HSBC Holdings plc A Safe Dividend Investment?

It’s easy to see why investors head for banking and financial services company HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US) when they are hunting for an income stream. After all, at today’s share price of 601p, the forward dividend yield is running at about 5.5% for 2015 and City analysts expect underlying earnings to cover the payout around 1.75 times that year.

Yet many will be wary of the financial sector after the events of recent years and that’s a good thing. However, perhaps HSBC is a little different…

How is that dividend paid?

The thing to remember about dividends is the only thing that pays them is cash. If a company doesn’t have the cash, it can’t pay the dividend, so a company paying a dividend is showing that its cash flow cuts the mustard, right? 

Wrong. Companies seem to pay dividends for all sorts of reasons, even if they don’t have enough cash coming in, and one thing that is erratic with HSBC is cash flow. This table shows the cash flow generated by the firm’s operations in recent years:

  2009 2010 2011 2012 2013
Net cash from operations ($m) 6,898 55,742 79,762 (9,156) 44,977

All firms use their cash flow to reinvest in maintenance capex first, so that existing operations keep ticking over. What’s left can go towards capex for growth and to reward shareholders through the dividend or by share buy-backs. We can see from the firm’s record that cash flow has been choppy. To put things in perspective, last year’s dividend payments cost HSBC Holdings $7,573 million.

Some years, then, HSBC’s cash flow hasn’t covered the dividend payment but, by averaging cash flow over the period shown, the firm seems to have kept the dividend growing:

  2009 2010 2011 2012 2013
Dividend (cents) 34 36 41 45 49

A word on cyclicality

HSBC has traded well through the volatility in the financial sector in recent years, coming through with fewer battle scars than some of its London-listed peers. However, the general landscape of the banking business is that profits rise and fall along with macro-economic cycles.

HSBC is a bit different to some other banks, though, as around 70% of its profits come from the Asia region, an up-and-coming market with fast-growing credentials. So, investors must weigh the growth expected in emerging markets such as China against the cyclical behaviour of the shares.

What now?

The cyclicality of the finance sector keeps me out of most banking shares, but HSBC’s record on dividend growth and its Eastern promise of growth make the firm attractive.

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Kevin does not own shares in HSBC Holdings.