Could the HSBC share price be the FTSE 100 bargain of the year?

HSBC Holdings plc (LON: HSBA) is one of the cheapest stocks in the FTSE 100 (INDEXFTSE: UKX), but should you buy the shares today?

| 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.

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.

A quick look at the HSBC (LSE: HSBA) share price will tell you the stock is undervalued compared to the rest of the market. At the time of writing, the shares are dealing at a forward P/E of 11.5, compared to the market average of 12.6. Also, the stock supports a dividend yield of 6.1%, which is above the FTSE 100 average of around 4.6%.

These numbers seem to suggest HSBC could be an FTSE 100 bargain. But is that really the case? Today, I’m going to try and answer this question.

Relatively expensive

HSBC might look undervalued at first glance, but compared to the rest of the UK and European banking sector, the shares are appropriately valued.

For example, one of the most common ways to value banks is to look at their price-to-book ratio. On this metric, shares in HSBC are trading at a ratio of 1. The rest of the European banking sector, on the other hand, is dealing at around the same valuation and some banks are trading at a much lower price, such as the Royal Bank of Scotland, which is currently changing hands at a price-to-book ratio of around 0.7.

And HSBC isn’t the only large UK banking stock that offers a dividend yield above the market average. City analysts expect both the Royal Bank of Scotland and Lloyds to yield more than 6% this year, which would make them some of the most attractive income stocks in the whole market.

Finally, HSBC’s P/E multiple might look cheap to the rest of the UK market, but compared to its close peers, the stock doesn’t look that cheap. The rest of the UK banking sector trades at a median P/E multiple of just 7.5.

Worth the price?

All of the above data tell me shares in HSBC are relatively expensive compared to the rest of the UK banking sector. However, as one of the largest banks in the world with substantial exposure to the fast-growing Asian economies, I think the firm deserves to trade at a premium to the majority of its European peers, which don’t have much international exposure.

It’s difficult to say how much of a premium HSBC deserves but, according to my research, shares in the group’s large international peers deal at around 11 to 12 times forward earnings, roughly the same multiple as HSBC currently commands. 

So overall, I don’t think the HSBC share price is a bargain at current levels. Other banking stocks are both cheaper and offer an improved level of income.

Nevertheless, if you are looking for international growth and an income stream from a globally diversified banking giant, then there’s no alternative. HSBC is the right company for you. The stock offers a market-beating dividend yield at a fairly undemanding price.

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.

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended HSBC Holdings. The Motley Fool UK has recommended 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.

More on Investing Articles

Ice cube tray filled with ice cubes and three loose ice cubes against dark wood.
Investing Articles

Just released: our 3 top income-focused stocks to buy before April [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »

Investing Articles

Is this the best chance to buy cheap FTSE 100 shares in a generation?

I want to buy shares when they're cheap, and sell... never, just keep taking the dividends. And the FTSE 100…

Read more »

Man putting his card into an ATM machine while his son sits in a stroller beside him.
Investing Articles

Could NatWest shares be 2024’s number one buy for passive income?

For those of us looking to earn some long-term passive income, how does NatWest's 7% dividend yield sound? It sounds…

Read more »

Investing Articles

£12K in savings? Here’s how I could turn that into £13K annual passive income

This Fool explains how investing a lump sum can help her build a passive income stream to enjoy in her…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Here’s why Rolls-Royce shares are now set to fly over the £4 mark

Once again, Rolls-Royce shares are crushing the FTSE 100. Should I add to my holding of this stock at the…

Read more »

Investing Articles

1 under the radar FTSE 100 AI stock investors should consider buying

Our writer explains why this FTSE 100 pick could be a shrewd investment with its established experience of using AI…

Read more »

Investing Articles

Does the beaten-down Diageo share price make it a no-brainer buy?

Harvey Jones spent years waiting for the Diageo share price to look like good value, before finally buying it in…

Read more »

One English pound placed on a graph to represent an economic down turn
Investing Articles

8%+ yields! Should I buy these FTSE 100 income shares this month?

Christopher Ruane weighs some pros and cons of two FTSE 100 shares, both of which have a dividend yield over…

Read more »