HSBCÂ (LSE: HSBA) (NYSE: HSBC.US) is one of the FTSE 100’s dividend champions. At current prices, the bank supports a 4.2% dividend yield and City analysts expect this to rise to 5.2%, for the 2014 financial year. The question is, can you trust HSBC’s dividend?
Investors are right to be cautious around HSBC’s dividend payout. The past five years have hardly inspired confidence in the banking sector with many banks, including HSBC, slashing their dividend payouts during the 2008 financial crisis.
In particular, HSBC slashed its own dividend payout by around 50% during 2009 and as of yet, the payout has not returned to pre-2008 levels. Unfortunately, this payout cut came as a surprise for many investors, as the bank had increased its dividend for nearly 10 consecutive years before the cut.Â
The bear’s argument
So, how likely is it that the payout will be cut? Well, the main headwind currently facing HSBC is the regulatory environment within the banking industry. For example, regulatory pressures could force HSBC to hold more capital, which could require the company to cut its payout and conserve cash.
In addition, HSBC’s global banking and markets division is exposed to market volatility and the net interest margin in the company’s retail division is contracting. Still, these factors are not show stopping and are all likely to only affect the bank in the short term.
That said, the biggest threat facing HSBC is the possibility of a new credit crisis developing within Asia, which is likely to send shockwaves around the world. If this were to happen, it is likely that the whole market would suffer.
The bull’s argument
However, HSBC is one of the worlds largest, most profitable and well capitalised banks. At the end of October the bank’s Core Tier 1 capital ratio was 13.3%, up from the figure of 12.7% reported previously, highlighting the banks impressive cash generation.
In addition, the bank generated $4.5 billion in pre-profit for the third quarter. This profit is actually more than the market capitalization of some FTSE 100 constituents.
Furthermore, digging into the numbers I can see that HSBC’s dividend cost the company a total of $9 billion during 2012, easily covered by the company’s free cash flow, which was $38.6 billion for the year.
But seriously, will HSBC have to cut its payout?
Realistically, HSBC is unlikely to cut its payout any time soon. As one of the biggest banks in the world, HSBC is safer than most. What’s more, HSBC is one of the most profitable banks in the world and cash is flowing into its coffers. So overall, I feel that investors can depend on HSBC’s dividend.