Today I am looking at whether HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US) is set to take the hatchet to shareholder payouts.
Dividends predicted to keep on rising
Despite the effect of the 2008/2009 banking crisis on HSBC’s recent earnings — the bottom line has fluctuated wildly during the past five years — the firm has still forged a reputation as a reliable provider of chunky dividend expansion.
Last year the business lifted the full-year payout by almost 9%, running broadly in line with expansions posted in previous years. And with City analysts forecasting that HSBC has put the fallout of the financial crisis behind it — earnings increases of 4% and 6% are pencilled in for 2014 and 2015 correspondingly — the bank is predicted to keep dividends moving in the right direction.
Indeed, the boffins at Investec expect ‘The World’s Local Bank‘ to lift the total payout from 49 US cents per share in 2013 to 51 cents this year. And a further rise, to 55 cents, is pencilled in for 2015. Clearly payout growth is expected to slow this year, with a mere 4% expansion currently pencilled in. But increases are expected to accelerate again in 2015 with an 8% rise estimated.
But macroeconomic concerns could halt growth
Investors should be aware of the perils that could put these projections in jeopardy. Firstly HSBC’s dividends through to the end of 2015 are covered just 1.7 times by forecasted earnings, based on Investec’s numbers, short of the minimum safety yardstick of 2 times.
Although these levels match those seen in the previous few years, this could come back to haunt investors should current economic turbulence in key emerging markets persist and conditions in the eurozone implode once more.
HSBC saw pre-tax profit crumble 12% during January-June, to $12.3bn, as the effect of aggressive asset sales has hampered revenues. The business is also having to put aside billions to cover an array of misconduct issues, from the mis-selling of payment protection insurance (PPI) through to manipulating precious metals prices, while it also faces mounting regulatory challenges.
However, the company’s ongoing programme to rid itself of non-core assets and slash costs is helping to strengthen the balance sheet, a promising omen for near-term dividend projections. Indeed, HSBC’s common equity tier 1 capital ratio rose 40 basis points to a solid 11.3% during the first half.
Unless the fragile global economy falls off a cliff, I expect dividends to continue trekking higher during the next few years. And further out, I believe that HSBC’s broad geographic presence, and in particular substantial exposure to the hot growth regions of Asia, should underpin stunning earnings, and consequently dividend, growth.