Can You Really Trust City Forecasts For HSBC Holdings plc, GlaxoSmithKline plc and Vodafone Group plc?

HSBC (LSE: HSBA)GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) and Vodafone (LSE: VOD) (NASDAQ: VOD.US) all look to be to be attractively priced based on City forecasts for the next two years. The problem is, City analysts can — and do — often get these forecasts wrong, which can sometimes leave investors in a sticky position.

Indeed, over the past year alone City analysts have reduced their earnings forecast figures for HSBC, Glaxo and Vodafone by a double-digit percentage. This leaves me wondering if there could be further reductions to come. 

Revising lower

cityHSBC, Glaxo and Vodafone are three FTSE 100 behemoths. Most investors will have at least one of these stalwarts in their portfolios. As all three companies currently support a dividend yield in excess of 4.5%, compared to the FTSE 100 average of less than 3.5%, they make a dependable backbone to build a portfolio around.

Still, investors should be careful, as the City has been reducing its earnings forecasts for these companies over the past year, which has pushed valuations higher.

Vodafone has been the most affected by these ‘moving forecasts’. This time last year the City was expecting Vodafone to report earnings per share of 29p during 2014, followed by earnings of 32p per share during 2015. These forecasts included Vodafone’s share of Verizon Wireless‘s income.

Excluding the Verizon Wireless income, and the share consolidation, the City was expecting Vodafone to report earnings per share of 9p during 2014 and then 10p during 2015. However, over the past few months these estimates have fallen further and the City now expects Vodafone to report earnings of  just 6.8p per share this year and 7.2p during 2015. 

Continual adjustment

Surprisingly, over the past year, Glaxo has seen its earnings forecasts adjusted lower by a shocking 34%! The City now expects the company to report earnings of 96p per share this year — this time last year earnings of 118p per share were expected. Similarly, 2015 forecasts have fallen from 130p per share down to 101p per share. 

HSBC has also seen its earnings forecasts revised lower, although the adjustment has only been less severe. For 2014, City analysts have adjusted the bank’s earnings lower from 62p per share, down to 54p per share. Further, 2015 earnings estimates have been downgraded by 10p, from 68p per share, to 58p per share. 

What does it mean?

How does it affect investors? Well, for a start falling earnings estimates have changed company valuations. Unfortunately, this could mean that investors see valuations change for the worse as analysts revise forecasts down further. 

However, dividend investors do not need to worry. In most cases City dividend forecasts are correct, as they are based on figures supplied by company management teams.

So, while City forecasts may fluctuate, dependable dividend stocks will continue to return cash to their investors. This is why the best investors use a basket approach by building a portfolio of reliable dividend-paying stocks, reducing risk and allowing you to sleep soundly at night.

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Rupert Hargreaves owns shares of GlaxoSmithKline. The Motley Fool recommends GlaxoSmithKline.