HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US) has seen its share price slide lately, but don’t let that put you off. Here are five ways it could make you rich.
1) As a recovery play
HSBC’s share price is down 17% in the last six months, on growing concerns over its exposure to struggling China. Frankly, I’m delighted. It was starting to look expensive anyway. It still trades at 14.2 times earnings, which looks toppy compared to Barclays at 8.4 times earnings and Standard Chartered at 9.6 times earnings. If current uncertainty continues, and China remains the focus of it, HSBC may get cheaper still, making it an even bigger bargain.
2) As a punt on the UK and Hong Kong
The UK is now Europe’s fastest-growing economy. That’s good news for HSBC, which generates 50% of its profits from the UK and former dependency Hong Kong. This means it is also exposed to the biggest growth story of all, China. Yes, China is in trouble right now, but you’re getting HSBC at a discount as a result. You also buying a company with forecast earnings per share growth of 9% in 2014 and 10% in 2015.
3) Because banks are cleaning up their act
The road to respectability will be long and painful for the big banks, and they face write-downs, mis-selling scandals and regulatory retribution every step of the way, but they will get there in the end. If you wait until HSBC has been given a clean bill of health before investing, you will have left it too late.
4) It’s an income machine
Share price growth comes and goes, but a good dividend is forever. Right now, HSBC yields 4.3%. By the end of 2014, that is forecast to hit 5.3%. By December 2015, it should be 5.9%. If you reinvest your dividends, as ideally you should, you will getting income upon income upon income. And if you hold the stock for 20 years, as ideally you should, you can reinvest them for growth upon growth upon growth. By then, you won’t care about today’s entry price and the phrase “Chinese hard landing” will have been consigned to the history books.
5) It is ready to crack on
HSBC is slowly righting the wrongs of the banking error. Its core tier 1 ratio is now a healthy 13.3%. It has sold off more than 50 non-strategic businesses in the last three years. Last week, Goldman Sachs noted that it has delivered generated 51% of banking sector profits and 42% of cash dividends since 1990, “a disproportionate share”. Goldman has the bank has a conviction buy with a target price of 900p. Today, you pay 635p. There is a wealth of difference between those two numbers.