HSBC has taken a bit of a beating over the past few years just like all the other banks, but I think this one has done a solid job of steering through the crisis. Earnings and dividends may be down substantially from the peak years of 2007/8, but things are not remotely as bad as they are at some of the other banks.
And there are new plans for growth. The recently announced a 3-year plan to improve returns and position the company for new growth is now in full swing, and over the next few years we’ll find out if it’s working or not.
So does the world’s second largest bank add up as an investment?
The first thing I look for in any investment is safety, and HSBC is about as safe as a bank can be. It’s huge and very internationally diverse with operations in most parts of the globe. It’s the number two bank in the world with its sights set on being number one, it has been profitable every year for a very long time and it always pays a dividend.
The earnings are generally quite stable and so it’s relatively easy to estimate what sort of earnings the company may make in the future and what sort of dividend it’s likely to pay.
But there’s more to investing than safety – most people want good returns too, from dividends, earnings growth and an increasing share price too. Speaking of share price, you can see a chart of the last 10 years below:
That’s not a great return for 10 years, although the dividend would have been some consolation. The point is that the market is now offering the chance to buy the same company, with about the same level of earnings and dividends, but for a substantially lower price than 10 years ago.
The table below shows the long-term results that HSBC has generated.
The growth rate over that period is something like 2%, although you can see clearly that this includes a period of high growth up to 2007 followed by a decline in earnings during the recession and banking crisis.
This is a relatively poor growth rate, with the median for large companies being closer to 7% or 8%.
Because of that, HSBC is unlikely to be of interest to growth investors.
In the last 10 years HSBC has earned around 57.5p per share, and by a fluke of luck current earnings are at almost the same level. The price on the chart above is 578p, which means that HSBC is trading at just over 10 times the average earnings of the last 10 years.
For a large, global market leader this is a relative low figure. The median of the FTSE350 stocks that I track is 18, so HSBC is comfortably ‘cheaper’ than average.
You can also say that for every pound a new investor pays, HSBC has generated on average just under 10p of earnings.
The dividend yield is currently around 4.5%. This is very likely to be a sustainable dividend that should also grow in line with earnings. It compares well with the average yield available from the stocks that I track, which have a median yield of 3.2%.
Better than its peers?
I keep track of about 200 large companies from all sectors, and HSBC is definitely an above average opportunity in that group. The emphasis is on income rather than growth, so if an investor was in the market for a reasonably high yield, low risk share then I’d say put HSBC on the list of stocks to review.
Better than a simple index tracker?
With all my large-cap investments I like to compare each stock to the FTSE 100 because that’s the easiest and safest large-cap investment to make. You can see a comparison of HSBC and the FTSE 100 in the table below.
You can see from that table that the yield remains the key difference. With HSBC’s income some 36% higher than the FTSE 100’s, an income investor would have to wait a long time for an index tracker to grow its dividend enough to catch up.
If the focus isn’t on yield but is instead on capital growth (including dividend reinvestment) then HSBC is still probably better than the average large-cap, it’s still probably a better bet than the index (as part of a diversified portfolio of course) and it’s unlikely to keep shareholders up at night.
Overall then I would give HSBC a ‘B’ grade at current prices.