The Motley Fool

This is what I’d do about the HSBC share price right now

Shareholders in Asia-focused bank HSBC Holdings (LSE: HSBA) tend to buy the shares for their reliable dividend income.

However, the HSBC share price dipped on Tuesday morning after the FTSE 100 bank’s 2018 results came in below expectations. Here, I’ll explain what’s gone wrong and why I don’t think investors should be too concerned.

Trade uncertainty

HSBC boss John Flint took charge in February last year with a promise to return the bank to growth by focusing more heavily on Asian markets. These generated 89% of the group’s profits last year.

However, slowing growth in China and “political pressure” on global trade has resulted in reduced demand for lending, slowing the bank’s growth. On Tuesday, Flint said that revenue had fallen sharply during the final few weeks of the year, due to those trade concerns.

Although the bank’s revenue still rose by 5% to $53.8bn in 2018, this was below analysts’ consensus forecasts for a figure of $54.7bn. Similarly, while adjusted pre-tax profit rose by 3% to $21.7bn, this only translated into after-tax earnings of $0.63 per share. Analysts had been expecting the bank to report earnings of $0.73 per share.

Should we be worried?

HSBC’s main purpose has always been to offer loans and other banking services to facilitate trade between Asia — mainly China and Hong Kong — and the west. If the Chinese economy continues to slow, demand for lending may soften further. And if the US-China trade war escalates, then there could be more disruption to trade between east and west.

However, I think these problems need to be kept in context. HSBC’s return on tangible equity — a key measure of profitability — rose from 6.8% to 8.6% last year. This suggests good progress is being made towards the bank’s 2020 target of 11%.

Unless things get much worse in 2019, I’d expect a fairly stable performance from the bank this year.

How safe is the dividend?

The dividend was left unchanged at $0.51 per share for 2018, giving a dividend yield of about 6.1%. However, this payout has now been pretty much flat since 2013. A flat payout for several years often indicates that a company is already paying out as much as it can afford.

HSBC’s 2018 results do seem to confirm this view. Last year’s earnings of $0.63 per share only covered the payout 1.2 times. That’s considerably lower than most other UK-listed banks.

A key regulatory measure of financial strength, the Common Equity Tier 1 ratio, also fell last year, from 14.5% to 14%. This ratio indicates the amount of surplus capital held by a bank, from which dividends can be paid. A lower CET1 ratio could limit dividend growth.

Buy, sell or hold?

If growth continues to slow in 2019, I’d expect Flint to find ways to cut costs to help protect the dividend. Unless conditions in China become much worse than expected, I expect the bank’s payout to remain safe.

At around 640p, HSBC shares are trading close to their book value of $8.13 per share (about 630p). In my view, that’s probably high enough at the moment. However, for income investors, the bank’s 6.1% yield continues to appeal to me as a long-term buy.

Want To Boost Your Savings?

Do you want to retire early and give up the rat race to enjoy the rest of your life? Of course you do, and to help you accomplish this goal, the Motley Fool has put together this free report titled "The Foolish Guide To Financial Independence", which is packed full of wealth-creating tips as well as ideas for your money.

The report is entirely free and available for download today, so if you're interested in exiting the rat race and achieving financial independence, click here to download the report. What have you got to lose?

Roland Head 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.