Dividend income investors would have noticed the headlines that our biggest banks are axing their dividends immediately. This is an important development for their management as well as shareholders. Therefore today, I’d like to discuss what the news may mean for investors in HSBC Holdings (LSE: HSBA).
HSBC is a global bank
The group is one of the largest banks and financial organisations worldwide. About three-quarters of this FTSE 100 member’s profit comes from mostly corporate clients in Asia. It also has substantial operations in the UK, as well as the European Union.
The Bank of England’s Prudential Regulation Authority (PRA) has recently been in consultation with the UK banking sector. And on 31 March, it requested they suspend all plans to return money to shareholders.
Thus many banks, including Lloyds, RBS, Barclays, Standard Chartered, Santander and HSBC, won’t be paying dividends or buying back shares, at least for the time being.
Before the announcement, HSBC’s dividend yield stood at a juicy 8.9%. And the shares were expected to go ex-dividend in mid-May. However, this payment isn’t going to happen.
So what can current, or potential, HSBA investors do now? Should they sell, hold, or buy the stock at this point?
Investors would need to answer this question in light of their risk/return profiles. But I’d like to highlight several points that may help them make better informed decisions.
First of all, I must remind our readers that banking is a cyclical industry. A bank’s fortunes are closely tied to the economic health of its main markets — i.e., China, including Hong Kong, in the case of HSBC. Any decision you’d take should ideally be based on your views about this important region.
Is China on the mend?
In February, HSBC management reported a 53% fall in full-year profits and announced it would lay off 35,000 staff. As part of its plan “to build a platform for sustainable growth,” the group will be cutting costs.
The coronavirus outbreak, which started in China and is now a global pandemic, has added further pressure on the company. Yet current news from China suggests the country might have contained the viral outbreak and its economy may indeed rebound faster than initially anticipated. Then the banking giant is likely to be a beneficiary of the positive economic developments.
However, if we have a prolonged global economic downturn, China and Hong Kong would also be further affected. And it’d possibly take several quarters for the HSBA share price to recover. Therefore, the rest of the year might bring further volatility and require patience on the part of long-term investors.
Year-to-date, the shares are down over 30%, hovering around 410p. I believe most of the bad news might already be in the price. I’d be a buyer of HSBC, especially if the price goes toward, or even under, 400p, a level seen in 1998 and 2009.Â
On the other hand, if you currently hold HSBC stock, you may want to hold on to your position to ride the wave. Alternatively you may diversify into other industries you believe may do better in a more challenging economic reality. You may also consider buying a FTSE 100 tracker.
If you’re not sure what may be the best option for your portfolio, you may also want to talk to a financial advisor.