I hope my thoughts on HSBC Holdings (LSE: HSBA) are not cursed by seeing the shares open at 666p on the day I write this. But I could easily see 750p in the not too distant future.
HSBC stock is the highest valued of our high street banks, with the shares on a P/E of 11.5. The others are much lower, with Royal Bank of Scotland and Lloyds Banking Group shares trading on multiples of around eight, and Barclays on seven.
But despite the low valuations of the others, it’s perhaps surprising to see HSBC offering the biggest dividend yield too, with forecasts suggesting 6.3%, with the others sporting predictions of around 5-5.5%.
HSBC’s dividends are friendly towards those who wish to reinvest, as the bank offers scrip dividends as an alternative to cash. It’s actively buying up its own shares too, in order to offset the dilutive effect of issuing scrip, returning $2bn in share buy-backs in 2018. I think that shows how much investors like the scrip option.
The obvious difference is that the UK-focused banks are being held back by Brexit fears, from which the China-focused HSBC is pretty much immune — but a slowing Chinese economy is surely in the minds of HSBC shareholders.
Saying that, I think there’s probably still something of a Brexit effect on HSBC shares, as there are surely many investors still steering clear of the banking sector altogether.
I also think there are investors who are overly worried about the Chinese economy — I’ve been reading of fears of a Chinese crash for years now, and I still don’t see it happening. What I do see is the gradual slowdown that’s been inevitable all along, as the country’s maturing economy drops back to sustainable levels from the 7% or so per year that we were seeing not so long ago.
I can’t help seeing some irony in commentators once predicting a big crash as Chinese economic growth was overheating and unsustainable, and now being gloomy and negative because that hasn’t happened and we’re instead seeing a perfectly manageable gradual slowdown.
HSBC did cut its dividend during the global banking crisis, but only modestly, and it didn’t need to shore up its balance sheet by raising new cash like many of its international rivals did. That, for me, helped underscore the reliability of HSBC’s dividend and, in my mind, cements the bank as a genuine buy-and-hold-forever FTSE 100 stock.
But what could HSBC’s dividend stream be worth over the long term? Even if it’s maintained unchanged for a decade and more, an investment in HSBC shares today at that yield of 6.3%, with all dividends reinvested (or just taken as scrip), would double in value in under 12 years.
That’s without any share price appreciation, and without any dividend rises for more than a decade — and I can see both of those things happening too, which would boost HSBC’s returns further.
If that’s not worth 750p per share, I don’t know what is — and I think it’s a steal at 666p.
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Alan Oscroft owns shares of Lloyds Banking Group. The Motley Fool UK has recommended Barclays, HSBC Holdings, and Lloyds Banking Group. 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.