Over the past three years, FTSE 100-member HSBC (LSE: HSBA) has seen its share price smash the blue-chip index. In the process, it’s provided a total return for investors of 21.7% per annum, compared to the index’s total annual return of 10.2%.
Following this performance, the stock is now trading at one of the highest valuations it’s ever achieved, and a significant premium to the rest of the UK banking sector. Specifically, shares in HSBC are currently dealing as a forward P/E of 12.1, compared to the UK banking industry average of 8.3.
So today I’m going to try and establish whether or not it’s still worth buying the HSBC share price, or should investors stay away and wait for a better price?
International growth I think it’s fair to say that HSBC deserves to trade at a premium compared to rest of its UK sector peers as, unlike most of them, incluidng RBS (LON:RBS) and Lloyds, HSBC is a global banking giant, with operations all around the world.
Meanwhile, its UK-focused peers still have the spectre of Brexit to contend with. We still don’t know what shape the UK’s future relationship with the EU will take and, until we do, I think this uncertainty will continue to rely on UK share prices.
On the other hand, HSBC is much more exposed to global trends, particularly economic growth in Hong Kong, where the bank generates the majority of its profits. With this being the case, I think it’s probably better to compare the company to its international peers, rather than domestic competitors. On this basis, the stock looks appropriately valued. The global banking sector has a P/E in the low double-digits, similar to HSBC’s 12.
Considering the group’s valuation compared to its international peers, I reckon that even after it’s impressive performance over the past three years, the HSBC share price could still be undervalued.
Indeed, I believe HSBC deserves a size premium as it’s the 6th largest bank in the world and second-largest bank outside of China. It’s difficult to say exactly what sort of premium the shares deserve, but I would be a buyer of the stock up to the mid-teens on a P/E multiple basis, so there might be an upside of as much as 20% on offer from current levels.
Market-beating income There’s more to the HSBC share price than its earnings. The stock also supports a market-beating dividend yield 5.96% at the time of writing. This level of income is highly attractive for income seekers, and the distribution looks safe for the time being. It is covered 1.4 times by earnings per share.
So, if you are looking for income, then I highly recommend considering the HSBC. Such a large dividend yield from one of the world’s largest banking institutions seems too good to pass up.
Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended HSBC Holdings (LON:HSBA) and Lloyds Banking Group (LON:LLOY). 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