HSBC (LSE: HSBA) (NYSE: HBC.US) is a stock that is near the top of my buy list, partly because the US debt deal was done (or at least partially done).
Indeed, with a US default now put off for at least a few more months, I want to take some more risk because I believe that equity markets could post gains.
HSBC seems to be a suitable stock because its beta is above 1, indicating that in a bull run its shares should outperform the wider market by 27%, since its beta is currently 1.27.
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Of course, if I’m wrong and markets fall then HSBC should fall 27% more than the wider market. However, I’d still be comfortable holding it for the medium to long term because I am convinced that the underlying quality is there.
For starters, HSBC is massively profitable. Return on equity was an impressive 8.4% last year, having improved from a 5 year low of 4.9% in 2009 when the credit crunch was in full swing.
Furthermore, return on equity has been relatively consistent over a five-year period and has ranged from the aforementioned 4.9% to a high of 10.1% in 2011. This not only shows that HSBC’s returns to shareholders are fairly predictable but highlights how stable it is during even the most challenging of market conditions.
In other words, if I’m completely wrong on my assertion that markets will have a good run, HSBC should keep delivering for its equityholders.
In addition, there is also scope for HSBC to increase its dividend payout ratio so as to make it an even more attractive income stock. Indeed, the bank paid out 61% of last year’s earnings as a dividend, while I think that a payout ratio of 70% is achievable and comparable to Lloyds which has stated that its aim is to pay out up to 70% of earnings as a dividend.
Doing so would make it an even more attractive income stock and could improve the defensive merits of the company if the market does, in fact, fall rather than rise in the coming months.
So, as I’m feeling bullish on the outlook for the stock market, HSBC seems to be a great stock to buy at the moment. Its relatively high beta, generous returns to equityholders and the potential for a higher payout ratio are all key reasons why it’s near to the top of my buy list.
