I am a big fan of dividends. While capital growth is what gets people excited, dividends are often the foundation of true long-term growth. With this in mind, when I am looking for potential new investments, one of the first things I like to do is see what stock is currently offering a nice yield. Near the top of this list at the moment is banking giant HSBC (LSE: HSBA).
As it currently stands, the stock offers a dividend yield (on an annual gross basis) of about 6.8%, and what’s perhaps even better, the company has increased its dividend payout by an average 6.1% per year for the past five years. From a pricing perspective, it also looks cheap. The stock has declined about 12% in August and has a forward-looking P/E of about 9.
Trouble with China Of course not all the prospects for the company are as positive. The protests and troubles in Hong Kong of late have many concerned over operations in the region – HSBC recently saying that “geopolitical issues” could impact some of its major markets. HSBC generates about 80% of its revenue in Asia, so it is perhaps no surprise then that the company broke its silence about the protests last week to urge everyone to reach a peaceful solution to the crisis.
In its latest earnings numbers earlier this month, the company posted decent figures – its Asian businesses leading the charge, with revenue in the region growing 7% in the half-year, compared to the same period in 2018. Most of the other headline figures were just as encouraging.
Trouble with Brexit Another area of concern of course, is Brexit. Though any and all companies have been using Brexit as an excuse for poor performance in recent years – with I believe varying degrees of legitimacy – the banking sector is certainly going to be one that will see the greatest impact.
All the major banks have been investing heavily in being Brexit-ready, and though this may mean it is one of the best prepared sectors, the outcome of any Brexit deal needs to be determined for the full costs to emerge.
Trouble with the US One final area of weakness for HSBC is in the US, where it has been trying to make inroads for years, attempting to build a strong franchise. For the most part it has fallen short. Earlier this month the bank abandoned its 2020 profit target for the US business, in the main due to “headwinds from the interest rate environment”, although it did reaffirm its commitment to the strategy.
The truth is of these three issues, Brexit is my only real concern. Exactly how the climate looks if and when a deal is made could easily lead to shock costs and share price movements for the company. That said, the banking sector is certainly one of the more prepared for Brexit. Given the high dividend yield and cheap price, I think HSBC could be worth investing in.
Karl has shares in HSBC Holdings (LON:HSBA). The Motley Fool UK has recommended HSBC Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019