Can HSBC Holdings plc Be A Dividend Champion For 2015 And Beyond?

Whether you take your dividends as income or reinvest them, the sustainability and future growth rate of the payout will be crucial to your returns.

Today, I’m assessing FTSE 100 bank HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US) as a potential dividend dynamo.

The basics

HSBC pays quarterly dividends. The dividends are set in US dollars (the company’s reporting currency) and converted to sterling shortly before payment.

HSBC has a fairly common-or-garden “progressive” dividend policy — director vocabulary for an aim to deliver a (non-specific) increase in the annual dividend.

Track record

HSBC had punched 15 years of double-digit (dollar) dividend growth before the financial crisis hit in 2008. The table below shows the company’s record from its high-water payout year of 2007 through to 2013.

  2007 2008 2009 2010 2011 2012 2013
Dividend per share 90¢ 64¢ 34¢ 36¢ 41¢ 45¢ 49¢
Dividend growth +11% -29% -47% +6% +14% +10% +9%

As you can see, HSBC slashed its dividend in 2008 and 2009. But from the new lower base, and with economic recovery, the company had returned to double-digit increases by 2011.

This time last year, analysts were forecasting further double-digit growth for 2013, having pencilled in a dividend of 51¢. In the event, the company paid 49¢. Management noted that the impact of an increase in the government’s bank levy “represented 5¢ per share which would otherwise have been available for distribution to shareholders or retained to strengthen the capital base or support incremental growth”.

Future prospects

The consensus forecast from City analysts is for a 6% increase in HSBC’s dividend this year to 52¢, followed by another 6% rise in 2015, to 55¢.

The forecasts reflect a number of headwinds HSBC faces: namely, regulatory burdens, fines and compensation for past transgressions, and weakness in emerging markets. Looking further ahead, while regulatory costs are an ongoing headwind, fines and compensation ought to have subsided to a gentle breeze after another couple of years, and emerging markets should, sooner or later, revert to a compass point that provides a long-term tailwind for HSBC.

In my view, analysts’ dividend forecasts for the next couple of years may prove to be a little optimistic (as they were last year), but longer-term earnings prospects could support sustainable annual dividend increases of perhaps mid- to high single-digits.

This sounds about right under a regulatory regime that would make banks safer than in the past without hamstringing profit-making potential to the extent that the reward for equity risk became unattractive for investors.

If my assessment is on the mark, HSBC looks an attractive prospect on a trailing dividend yield of 4.7% (at a current share price of 630p), compared with 3.5% for the FTSE 100 as a whole.

Finally, if you're thinking about investing in banks, or already own shares, I would strongly urge you to expand your knowledge by reading the Motley Fool's "Essential Guide to Investing in Banks".

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G A Chester 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.