Today I am explaining why I consider HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US) to be a tremendous income pick.
Bumper yields batter the opposition
Despite the onset of wildly-fluctuating earnings in recent years, HSBC’s enviable balance sheet has enabled it to maintain a progressive dividend policy throughout, and the bank has lifted the full-year payout at a compound annual growth rate of 9.6% since 2009.
And City brokers expect the banking giant to continue doling out sizeable dividend increases during the medium term at least. A 6% increase to 52 cents per share is pencilled in for 2014, with an additional 8% rise, to 56.1 cents, predicted for the following 12-month period.
Such projections create enormous yields of 4.9% and 5.3% for 2014 and 2015 respectively. Not only do these figures beat a forward average of 3.2% for the FTSE 100, but a prospective readout of 3.1% for the complete banking sector is also comprehensively usurped.
Considerable capital pile boosts dividend outlook
On top of HSBC’s bubbly dividend prospects, the number crunchers expect ‘The World’s Local Bank‘ to continue punching solid earnings growth through to the end of 2015, with expansion of 7% chalked in for 2014 and which edges to 9% next year.
These improvements create decent dividend cover of 1.8 times for this year and next, just below the security benchmark of 2 times prospective earnings. Indeed, investor confidence in the prospect of current forecasts being fulfilled should be boosted by HSBC’s robust capital reserves — the firm’s ability to throw up boatloads of cash pushed its common equity tier 1 (CET1) ratio to 11.3% during January–June from 10.9% at the close of 2013.
Trading conditions remain difficult, however, and HSBC announced this week that the effect of ‘low interest rates and reduced financial market volumes‘ forced a sizeable 4% revenues drop during the first half, to $31.4bn, which in turn pushed underlying pre-tax profit 4% lower to $12.6bn.
The bank continues to offload non-core assets across the globe in an effort to de-risk against this difficult climate and bolster the balance sheet, while its aggressive cost-cutting programme is also helping to boost capital reserves.
And although current concerns over emerging markets has dented turnover at HSBC in recent months, I believe that the company’s huge exposure to the growth regions of China and the Asia Pacific should allow it to enjoy resurgent profit growth over the long-term, and consequently maintain appetising dividend increases.