Since being forced to slash the full year payment by a whopping 47% once the financial crisis took hold in 2008, to 34 US cents per share, HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US) has pulled out all the stops to bolster the balance sheet and get its once-proud dividend policy rolling higher again.
This work has seen the dividend rise at a compound annual growth rate of almost 10% during the past five years, and City analysts expect the business to keep payouts stepping higher this year and beyond.
Buoyed by an expected 4% earnings uptick this year, “The World’s Local Bank” is expected to lift the dividend 3% to 50.6 cents. And a predicted 6% bottom line improvement in 2015 will result in an 54.4 cent reward, according to current forecasts, up 7.5% from the current year.
As a result, HSBC’s yield moves from an impressive 5.3% for 2014 to an eye-popping 5.7% for next year. By comparison the complete FTSE 100 carries a forward average of just 3.3%.
Bank on the bulky balance sheet
What is clearly noticeable, however, is the expected slowdown in dividend growth this year and next versus previous years. Indeed, the effect of macroeconomic turbulence in the company’s key Chinese and Hong Kong markets, not to mention the effect of souring trading activity on the back of these worries, has significantly dented revenue expansion in 2014 and with it potential dividend expansion.
Still, HSBC has seen conditions improve in recent months as market sentiment and consequently client activity has improved, and the business expects strong growth in Asia and the UK to continue. Indeed, strength in these places helped the top line at its critical Global Banking and Markets and Commercial Banking surge higher during July-September.
Naturally, further deceleration in China could blow this momentum off course, and many analysts expect Beijing to register GDP expansion register of around 7% in 2015, the lowest reading for decades. And the possibility of financial contagion from the eurozone on HSBC’s British marketplace could further dent revenues at the business.
With dividends this year and next covered just 1.7 times by earnings, below the safety benchmark of 2 times, investors could begin to get twitchy should conditions deteriorate sharply in the coming months.
However, I believe that the firm’s robust capital pile should assuage investor concerns over prospective payments in the near-term. The European Banking Authority’s examination in November put HSBC’s CET1 ratio at 9.3%, smashing the minimum target of 5.5%, while the Bank of England’s own tests this month also gave the firm a clean bill of health.
On top of this, I believe that the effect of extensive cost-cutting and asset shedding at the firm should bolster the company’s balance sheet and mitigate the effect of near-term revenues pressure. And over the long-term, I am convinced that HSBC’s sprawling presence across emerging regions should deliver terrific earnings and dividend expansion in line with rising income levels and consequently banking product demand.