Could HSBC Holdings plc’s Dividend Be Under Threat?

Is HSBC Holdings plc (LON: HSBA)’s dividend at risk?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

HSBC (LSE: HSBA) (NYSE: HSBC.US) supports one of the most attractive dividend yields in the FTSE 100. At current levels, the bank supports a dividend yield of 4.6% and the City has a yield of 4.8% pencilled in for next year.  

Nevertheless, this hefty payout is not gold plated and the bank has been forced to cut its payout before. So the question is, can you really trust HSBC’s dividend?

Falling earnings hsbc

HSBC has been working hard to transform itself over the past few years. The bank is currently in the second phase of a turnaround plan that began during 2011, designed to make the bank less complex and more efficient. As part of this plan, management has axed more than 40,000 jobs and sold or closed 60 businesses, producing annual cost savings of more than $5bn.

Unfortunately, despite HSBC’s best efforts to cut some costs, other costs are rising. For example, during the first half of this year HSBC’s management reported that the bank was now spending $700m to $800m per annum on compliance and risk management, an increase of around 20% compared to last year. 

As a result, underlying operating expenses ticked higher by 4%, to $18.2bn, pushing the bank’s cost efficiency ratio up to 58.6%, from 53.5% as reported last year. Management is targeting at mid-50s cost efficiency ratio. 

At the same time HSBC’s sales are falling, as the bank pulls out of some markets. Second-quarter underlying revenues fell 4%, to $31.4bn, from $32.7bn a year earlier.

So, with costs rising and revenues falling HSBC’s earnings are sliding. Second quarter pre-tax profit fell to $12.3bn, 12% lower than the $14.1bn it earned in the corresponding period in 2013. HSBC’s first-half earnings per share dropped nearly 10% from $0.54 last year, to $0.50 this year.

No threat 

Still, during the first half HSBC paid out approximately $0.20 per share in dividends, easily covered by earnings per share of $0.50 but risks remain. Indeed, the bank’s management revealed during the first quarter of this year that it is not possible to tell how much capital the HSBC should be holding in reserve. The bank could be required to boost its capital position at short notice.

That said, HSBC does have a solid financial cushion. The tier one capital ratio stood at 11.3% at the end of the second quarter. However, with a balance sheet in excess of $2trn, HSBC is extremely exposed to sudden shocks. If the bank were to need more capital, the dividend would be the first thing to go. 

Safe for now 

For the time being at least HSBC’s dividend looks to be safe, although I would strongly recommend that you do your own research before making any trading decision.

To some, the banking sector may appear daunting. Indeed, the complex numbers and formulas used to value banks can be daunting for even the most experienced analyst.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

2 FTSE income stocks investors should consider buying in April

Income stocks are a great way to build wealth. Our writer details two picks she believes investors should consider snapping…

Read more »

Investing Articles

What might the 5-year price chart tell us about BT shares?

Christopher Ruane considers what clues the long-term performance of BT shares might offer him about business performance and whether to…

Read more »