Why I’d avoid 5.3% yielder HSBC Holdings plc and buy this income and growth stock instead

Why this stock appeals to me, and why I think HSBC Holdings plc (LON: HSBA) is dangerous.

 

| 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.

Investors who bought shares in banking giant HSBC Holdings (LSE: HSBA) at the end of 2009 for recovery and growth following the financial crisis will probably be disappointed today, eight years later.

Their original purchases would have been at just over 700p per share, so the recent share price of 705p shows that their invested capital has remained broadly flat and has lost some of its purchasing power due to the ravages of inflation.

A tortuous journey

However, the chart reveals that the journey of the share price over that eight-year period has been full of ‘excitement’ for shareholders, with the price dipping below 500p in December 2011, going as low as 430p in May 2016 and never breaching the 800p barrier at any time.

During the period, operating profits dipped and recovered, and the dividend payment held steady but struggled to make any real progress. Right now, the stock market is assigning HSBC a modest valuation. The forward price-to-earnings (P/E) rating for 2019 sits just below 13 and the forward dividend yield is 5.4%. But the firm deserves its low rating. City analysts following it expect earnings to rise just 5% in 2019, which follows a plunge in earnings during 2016 and a partial recovery during 2018.

To me, the business looks unstable and buffeted by the effects of cyclicality in its markets. The whole banking industry is chock full of highly cyclical companies and we never know when the next cyclical plunge will arrive for profits, dividends and the share price. As a long-term buy-and-hold investment, I see HSBC Holdings as risky right now and the big dividend on offer does nothing to soothe my concerns because I know it can disappear in a puff of smoke at any time.

A survivor set to thrive?

Instead of HSBC Holdings, I think non-standard financial products provider H&T Group (LSE: HAT) looks far more attractive. The firm delivered decent-looking full-year results today with gross profit almost 12% higher than a year ago and diluted earnings per share up just over 48%. The directors displayed their confidence in the outlook by pushing up the total dividend for the year by just over 14%.

The quality, value and momentum indicators look attractive for this firm. The recent share price of 356p throws up a forward P/E rating just below 10 for 2019 and the forward dividend yield runs close to 3.7%. City analysts following the firm expect earnings to grow 4% during 2018 and 11% in 2019, which is an encouraging outlook on growth.

During 2017, H&T grew its revenues from the core business of pawnbroking, retail sales and personal loans. Chief executive John Nichols said: “Personal loans and our est1897.co.uk online jewellery sales are particular highlights, and there is significant scope to continue to grow these aspects of the business.”

According to Mr Nichols, the marketplace underwent “significant” changes over the past four years. Competition from other players peaked, the price of gold plummeted, and new regulation caused “a number of our competitors to restructure their businesses or exit the market.”  Yet H&T looks like one of the survivors in the sector and I think the firm looks well placed to thrive from here.

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.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings. 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.

More on Investing Articles

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

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 »