There is plenty for investors to dislike about HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US). The share price is down 10% over the past year, and 6% over three years. In March, Credit Suisse downgraded the business, warning of trouble in Asia, where it generates two-thirds of its profits. The blighted bank has suffered other local difficulties, notably a squeeze on Latin American earnings. Banking remains a troubled sector generally, and the recovery process still has further to run. Happily, there is one thing I do like right now.
HSBC is forecast to yield 5.2% by the end of this year. No savings account offers anything like that much. Only a handful of FTSE 100 stocks match it. Even if the share price never rises again, a yield of 5.2% will still double your money in less than 14 years.
Emerging Markets Aren’t Going Anywhere
I don’t expect the HSBC share price to stay flat for the next 14 years, far from it. After three years of underperformance, the cycle will move back in its favour soon enough. HSBC isn’t exactly a disaster zone, in any case. Its full-year results, published in February, showed a 9% rise in reported profit before tax to $22.6 billion. That figure may have disappointed a market greedily expecting another $2 billion or so extra, but that’s all in the past. Those are still whopping profits.
The global economy may be shaky, and emerging markets, led by China, highly uncertain. But that is largely reflected in the HSBC share price (although a full-scale blow-up isn’t). I’m writing this for long-term investors in mind, and in the long term, the emerging markets story is still intact. They have youthful populations, low consumer debt, an emerging middle-class and billions to pour into infrastructure and urbanisation. An emerging market hiccup was inevitable, but the trend is their friend.
And You Will Soon Get 5.6%
HSBC management has been grumbling about ever-tightening regulations in the UK, which may squeeze profits and bonuses. But the bank has been successful in meeting demands so far, and now boasts a beefy core tier 1 ratio of 13.6%. That’s up from 12.3% in 2012, and almost double its 2008 figure. Regulatory creep may put a brake on future growth, by limiting opportunities while ratcheting up costs, but it’s a burden that every bank must bear. HSBC is simply shouting loudest.
Markets are skittish right now, and that has hit HSBC. We’re all waiting to see what will succeed the five-year bull run. On the plus side, this means you can buy the bank at a modest 12.3 times earnings. That makes it cheaper than Standard Chartered, which trades at 13.2 times earnings despite its greater exposure to emerging markets troubles. HSBC is positively cheap compared to Barclays, which trades at 14.8 times earnings.
HSBC may have fallen short of sky-high investor demands, but it is still on course to deliver earnings per share growth of 12% this year, and another 11% in 2015. By then, this stock will yield 5.6%, which will make it even harder to ignore.