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Why I’d shun the HSBC share price for this 6%+ yielding small-cap

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Scene depicting the City of London, home of the FTSE 100
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Over the past five years, HSBC (LSE: HSBA) has built itself a reputation as one of the FTSE 100’s top income stocks. Shares in the global banking giant currently support a dividend yield of 5.7%. On top of this distribution, the bank is also spending billions buying back shares as an alternative method of returning funds to investors. 

However, even though HSBC’s 5.7% dividend yield is attractive, I’ve recently stumbled across another financial sector peer that I believe could be a better income and growth buy for your portfolio. 

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Global income

One of HSBC’s most attractive qualities, apart from its market-beating dividend yield, is the group’s international diversification. And the same can be said for investment firm Apax Global Alpha (LSE: APAX)

Apax isn’t your average investment. In its own words, the company offers “unique exposure to an extensive portfolio of private equity investments” as well as “tailored investments in equity and debt.” To put it another way, Apax Global is a globally diversified investment fund, investing around the world, and across asset classes to achieve the best returns for investors. 

Unfortunately, since its IPO in June 2015, it has failed to live up to expectations. Shares in the investment business have added just 8.8% excluding dividends since going public. Over the same period, the FTSE 100 has gained 13%. 

I believe it’s only a matter of time before this performance is reversed. 

Underlying growth 

Shares in Apax might have struggled since June 2015, but the underlying business is charging ahead. Net asset value per share, which was 127p at the time of IPO, has grown to 170p (at the end of June 2018), up from 165p at the end of 2017 according to the firm’s numbers for the first half of 2018, published this morning. 

These numbers indicate to me that shares in Apax are severely undervalued. NAV has increased 34% over the past three years, but it seems as if the market does not understand the opportunity here. As well as trading at a 25% discount to NAV, today management has announced the group’s first semi-annual dividend of 4.3p per share. Including the full-year payout (4.2p based on last year’s distribution) the shares are set to yield 6.3% this year. 

To me, this market-beating dividend yield, coupled with Apax’s discount to NAV, looks too good to pass up. This is why I believe the stock is a better buy than HSBC. 

Limited growth 

HSBC might be a FTSE 100 dividend favourite but I believe that its growth potential is limited. City analysts seem to agree with EPS growth of just 7% expected for 2018, followed by growth of 4% for 2019.

Based on these figures, shares in the bank are trading at an attractive forward P/E of 12, but while cheap, this multiple looks expensive compared to Apax’s NAV discount. 

Another advantage Apax has over HSBC is flexibility. As a bank, HSBC’s growth opportunities are limited to the financial services industry. Its private equity business can invest in companies in any sector. I believe this exposure gives the group more scope to grow and should lead to higher, more predictable long-term returns. 

In other words, if it is just income you’re after, HSBC is a good investment. If you want income and growth at a bargain basement price, my money’s on Apax.

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Rupert Hargreaves owns no share 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.

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