If you’ve £1,000 to invest, or any other lump sum, there’s a huge choice out there. Right now, the FTSE 100 index is packed full of bargain stocks, many of them trading on dirt-cheap valuations, while offering generous yields.
HSBC looks cheap right now
You only have to look at global banking giant HSBC Holdings (LSE: HSBA) to see what I mean. This mighty operation, which has a market-cap totalling almost £114bn, currently trades at just 10.9 times forward earnings, well below the FTSE 100 average of just over 18 times earnings. HSBC is trading at a large discount to its blue-chip peers right now. So why is that?
One reason is HSBC generates a huge chunk of its earnings from China and Hong Kong, and has been caught in the political crossfire during recent democracy protests. These have been going on for months. HSBC has seen its buildings daubed with red paint and been hit by other forms of vandalism after being accused of working with Chinese authorities to cut off funding for protesters.
In situations like these, companies have to tread a thin line, with the risk of political threats on one side, and reputational damage on the other. As if that wasn’t enough, the bank has also been caught on the frontline of the US-China trade war. The HSBC share price has reflected this concern, falling 13% in the last six months.
Less exposure to Brexit
HSBC, like all the UK-listed banks, was also caught up in last year’s Brexit uncertainty, although that now seems to be easing. Brexit is less of a concern for HSBC than FTSE 100 rival Lloyds Banking Group, which has far more exposure to the UK, and far less overseas diversification.
Multinationals like HSBC will always face geopolitical problems, but current concerns could actually be a great opportunity to buy this stock, provided you intend to hold on for the longer run. One benefit, as I mentioned, is the bargain entry price. Another is that you also get a whopping dividend income, with the stock forecast to yield an income worth 6.8% a year in the months ahead.
To put that into perspective, the FTSE 100 as a whole currently yields just 4.34%. At this rate, if you reinvest your HSBC dividends back into your stock, you will double your money in less than 11 years, even if the share price doesn’t rise at all in that time. I suspect it will though.
Growth and income over the longer run
This is a business with strong operating margins of 38.5%. Earnings are forecast to dip 1% this year, but rise 11% in 2021.
My reasons for recommending HSBC now are twofold. First, I think the share price is due some kind of snapback. It may take two or three years, but it’s worth positioning yourself ahead of that. Second, you get a juicy income while you wait.
How long should you hold HSBC’s stock? Forever sounds about right.