Why I’d buy HSBC Holdings plc today

It’s always tough when looking for dividends — whether to go for high yields today, or modest-but-progressive ones. After all, a cash payout that dwindles over the years due to inflation isn’t much good.

That’s a perceived problem with HSBC Holdings (LSE: HSBA), whose dividend is set to yield 5.5% this year and next. But that would see it pegged at the same 50-ish cents level six years in a row, and the bank has previously said there’ll be no dividend increases until earnings growth resumes.

And in Monday’s first-half results, it confirmed it has kept its first two quarterly dividends at a total of 20 cents.

Cash returns

But I like the look of HSBC’s cash rewards for a couple of reasons. Firstly, I’m encouraged by the firm’s scrip dividend scheme, which is widely followed — and that takes some pressure off cash demands. 

And looking at dividends alone is missing the bigger cash-return picture. With a very strong common equity tier 1 ratio of 14.7% (up from 13.6% in December), the capital position is very strong.

That’s enabled HSBC to hand back $1bn in share repurchases during the half, and the board has approved a further $2bn due to complete in the second half. Perhaps ironically, the bank is issuing new shares as scrip dividends while buying them back with excess cash.

On top of that, adjusted pre-tax profit for the half was up 12.4% to $11.97bn, loans and customer accounts are rising nicely, and the bank has seen a 17% rise in revenue synergies between its various global businesses (and that has been a previous criticism — a lack of ‘joined-up’ business).

Asian Insurance and Asset Management are both up, and approval has been obtained to commence HSBC Qianhai Securities (the first in China majority owned by an international bank).

I reckon HSBC’s cash rewards are going to continue upwards

The steadiest dividend?

I’ll admit up front that I wouldn’t buy Imperial Brands (LSE: IMB) shares, for ethical reasons. But I’m not going to try imposing that on others, and if you want a steady long-term dividend, it’s hard to get better than this FTSE 100 star.

Although overall volumes of tobacco consumption are falling, the ongoing move to more upmarket brands has seen revenues steadily increasing — and there are literally billions of folk in the developing world being targeted for upselling to more prestigious products.

This year’s first-half was hit by currency movements, with adjusted operating profit at constant currency actually falling by 7.6% (headline +6.3%), but the interim dividend was lifted by 10%. Growth brand volumes were also still rising, up 3.2% in the period and with an improved market share.

Dividends climbing

Imperial is forecast to lift its full-year dividend by the same 10% this year, and it should be very well covered by earnings. With a cash conversion ratio of 99.6% and net debt (before the adverse effects of currency exchange) falling, the cash situation looks good.

The only downside recently has been a falling dividend yield due to a bit of a bull run on the share price — 2016’s yield had dipped to 3.9%, down from 5% just three years previously. But a share price retrenchment since mid-2016, to 3,180p, puts the forward yield now at 5.4%.

I see Imperial Brands as easily capable of keeping its dividend growing ahead of inflation for quite some time yet

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended HSBC Holdings and Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.