Will Rising Profits Take HSBC Holdings plc To 700p In 2016?

What determines how valuable a company is? Turnover? Dividend yield? Well, most people would say profitability. In basic terms, the more money a company makes, the more it is worth.

One of the most profitable UK firms

And what are the most profitable companies in Britain? Well, you might think of oilies BP, and Royal Dutch Shell. But the share prices of both these giants have been sliding as the oil price has tumbled. What about mining firms? BHP Billiton is one of the world’s leading commodity businesses. But as the price of metals and minerals has been crunched, so has BHP’s share price.

Then there’s Vodafone, GlaxoSmithKline and AstraZeneca. All three are great businesses, but none of them can claim to be Britain’s most profitable company.

Instead what is emerging as one of the country’s most valuable firms is that most unlikely of beasts: a profitable bank.

Step forward HSBC (LSE: HSBA).

A bank? Profitable? With their reputation? These days, post-Lehman and with record low interest rates, PPI and money laundering fines, that almost seems a contradiction in terms. But HSBC makes more money than just about any other company in Britain, and any other bank globally. It leaves rivals like Barclays and Lloyds Banking Group in the dust.

Falling share price

But you know the odd thing about it? The share price of HSBC has been falling steadily for the past three years. In 2013 it stood at over 700p. Today it’s valued at 523p. For long-suffering bank shareholders, it’s been a difficult and bumpy ride.

But I think that better things lie ahead for this unloved banking titan and that HSBC in future years will be as profitable as it has ever been. Look at the reported and predicted five year earnings per share progression, and you’ll see what I mean:

2012: 45.52p

2013: 50.94p

2014: 44.33p

2015: 51.90p

2016: 53.19p

It’s expected that a slight dip in profitability for 2014 will be reversed for 2015, with profits likely to be as high as when the share price was 700p+. That’s why I think the prospects are good for the share price to reach its 2013 highs.

Throw in a dividend yield that’s consistent, rising, and currently stands at 5.67%, and this stock starts to appeal even more.

HSBC was one of the few British banks to emerge virtually unscathed from the Credit Crunch and the Great Recession. That’s why investors must have been even more disappointed when the share price fell in recent years. But I suspect the tide is turning.

Of course, there’s another key factor. I’ve often talked about a shift of the world’s centre of gravity to the East and HSBC is well placed to benefit from this. So frustrated shareholders shouldn’t give up hope as this bank really is a strong buy.

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