Can You Trust HSBC Holdings plc’s 5% Dividend Yield Or Should You Look Elsewhere?

The recent windfall that Vodafone’s investors have received, following the company’s sale of its stake in Verizon Wireless to former joint-owner Verizon Communications, has left investors with a lump sum of cash, which many are still looking to invest. 

For those looking for income, with its near 5% dividend yield, HSBC Holdings plc (LSE: HSBA) (NYSE: HBC.US) could be the investment of choice. But how trustworthy is the company’s payout?

Should I be concerned about recent results?

Before we dive into the question of whether or not HSBC’s dividend is sustainable, some investors may want reassuring about HSBC’s recent set of results, which appeared to spook the market. 

The main reason why investors expressed concern over HSBC’s recent results was management’s warning that economic turmoil in emerging markets would hold growth back over the next year. Unfortunately, the bank also missed several self-imposed cost reduction and profit targets set for the year, which added to investor concern.

Still, on the positive side of things HSBC reported that underlying, or adjusted, profit before tax for 2013 was up 41% at $21.6bn. In addition, the bank’s Tier one capital ratio increased to 13.6% from 12.3% the year before.

Further, HSBC issued some upbeat long-term forecasts, predicting that trade between Asia, South America and the Middle East is likely to expand ten-fold  over the next three decades or so, and that the bank is well positioned to benefit from this trend.

In the short-term though, HSBC will be able to profit from the economic recovery currently underway within the UK and US, which should make up for slowing growth in developing markets. HSBC’s management remains proactive and continues to seeking annual cost savings of $2bn to $3bn per year.

So the results were good, what about the dividend?

HSBC announced dividends totalling approximately 30p per share during 2013, up 9% from the year before, and with annual profits growing in the high double-digits, this payout growth is likely to continue. Actually, a payout of 30p per share translates into a dividend yield of 5% at current levels, meaning that HSBC now supports one of the best dividend yields in the FTSE 100.

And it’s not as if HSBC is struggling to make this payout. The bank’s earnings per share came in at 53p for 2013, indicating that the bank is paying out 57% of earnings in dividends. On the cash side of things, HSBC generated around £27bn in cash from operations during 2013, of which it only paid out £4bn in dividends.

Summary

So overall, HSBC’s dividend payout look safe and the company is well positioned for long-term growth. That being said, in the short-term, volatility in emerging markets could impact the bank.