How can anybody complain about how difficult it is to get a decent level of income on your investments these days when top blue-chip stocks like these two offer around 5% to 6% a year? But are they built to last?
Hold on tight
The heady July days when Asia-focused bank HSBC Holdings (LSE: HSBA) yielded 7.8% are gone with the summer sunshine. Congratulations if you bought the stock back then because the share price has bounced 27% over the past three months, although the yield remains a juicy 5.53%. As the global search for yield intensifies, the bank continues to look like a natural haven for income seekers.
Unsurprisingly, given the heady recent yield, there has been some concern over the durability of HSBC’s dividend. Earnings per share (EPS) fell 18% in 2014, 6% in 2015 and are expected to fall 17% this year, in what is a dismal run. Pre-tax earnings fell from $22.56bn in 2013 to $18.87bn last year, making it harder for HSBC to fund its dividend. Current forecasts show cover standing at just 1.1 times, which is wafer thin.
Margins call
Global banking is a tough sector, as record low interest rates squeeze net lending margins, and competition intensifies. The good news is that China hasn’t crashed yet, despite constant worries about its credit and housing bubble, and the bank’s EPS are forecast to turn positive in 2017, rising a solid 6%. Investors will have been cheered by the $2.5bn share buyback announced in August, as well as management’s renewed commitment to its current 51c dividend. Don’t be too hard on yourself for failing to buy the bank in July because trading at 11.77 times earnings and yielding well over 5%, it still looks reasonably priced today.
There hasn’t been much share price growth to celebrate at Legal & General Group (LSE: LGEN), which is still struggling to shake off its post-Brexit slump. More than six years of unbroken growth in the wake of the financial crisis finally came to an end last year, and the share price is down 17% in the past 12 months. Volatile stock markets have played their part, inevitably, given that the insurer is primarily best known as an index-tracker specialist. Few investors believe the bull run has much further to run, and financials generally have taken a pounding.
One benefit is that you still get a super-sized yield, with the stock yielding a forecast 6.9%. Better still, dividend sustainability is less of a worry than at HSBC, with forecast cover of 1.5 times. 2016 will mark the fifth successive year of double-digit EPS growth. But be warned, this is expected to be flat in 2017, with revenues forecast to drop sharply from £6.4bn to £5.3bn.
Still, Legal & General looks like a solid income play, with a group solvency II ratio of 158% and £5.3bn of surplus capital. Low-cost tracker funds are firmly in fashion as retail and institutional investors wake up to the drag annual management charges inflict on long-term performance. The group has also offset the slump in annuity sales following last year’s pension freedom reforms by boosting bulk annuity sales. Operating margins of 25.3% also impress and trading at 11.26 times earnings it isn’t expensive, Legal & General looks even more tempting than HSBC.
