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HSBC shares: Here’s what I think is next for the dividend

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HSBC (LSE:HSBA) suspended its dividend earlier in the year due to pressure from the Prudential Regulation Authority. The regulator was concerned about liquidity during the Covid-19 crisis. Now that Britain has approved a Covid-19 vaccine, however, there is hope that the bank will start paying a dividend again. 

Given the expected return of dividends, here’s what I think management will do with the bank’s payout in the next few years. 

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HSBC shares: Dividend expected to return

In terms of its dividend, there are a few reasons for expecting HSBC shares to pay one beginning either this year or next. 

To begin with, regulators have recently given their okay for banks like HSBC to pay dividends again. HSBC is also in a strong enough position to do so. It’s both profitable and adequately capitalised. For the third quarter, for example, the bank reported a better than expected profit before tax of $3.07bn. The company also reported a core tier 1 ratio of 15.6%, a number higher than management’s target of 14% to 14.5%. Given the Covid-19 vaccines news, many expect the world economy to improve next year. That economic recovery could help the bank’s profits as well. 

It’s also management’s intention to begin paying a dividend. Management said in late October, “We are working hard to get back to being able to pay dividends and we seek to pay a conservative dividend if circumstances allow with respect to the 2020 financial year”.

Analyst estimates and the future

In terms of what might be next for the dividend, I believe it’s going to be a process. I think management will err on the side of caution initially and not pay as much as they could. If HSBC shares pays a dividend this year, the dividend will likely be conservative. Goldman Sachs estimates it could be $0.15 per share for the second half, if there is one at all. The average analyst estimate of the bank’s annual dividend for next year is 27 cents per share

After 2021, if economic conditions improve, outlook brightens, and management executes, I believe the dividend could rebound closer to where it was prior to the pandemic. From 2015 to 2018, HSBC paid the same annual dividend of $0.51 per share. However, I think that process could take several years. It could take a while for interest rates and the world economy to normalise.

Is the stock a buy?

Although HSBC’s dividend might not fully rebound for quite some time, I reckon there are still plenty of ways for management to generate value. Management could use earnings to help with the company’s restructuring efforts. They could also use the excess earnings to finance mergers and acquisitions. 

If management executes well, I reckon sentiment around the stock could improve. Given that HSBC shares trade for a price-to-book value ratio of around 0.57, I think the stock is cheap. With the bank’s many advantages, I’d buy and hold HSBC shares.

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Jay Yao 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.

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