If you like investing in out-of-favour FTSE 100 blue chips, as I do, then I suggest you run the rule over HSBC Holdings (LSE: HSBA) (NYSE: HBC.US). While high street rivals such as Lloyds Banking Group have raced ahead in recent years, HSBC has been stuck in first gear. In fact, its share price has stalled for the past three years, going precisely nowhere. That has knocked the forecast price-to-earnings valuation to 10.7 times earnings for December 2014. Given that HSBC is supposed to be the good bank, that doesn’t look like a bad price to pay.
I suspect it won’t look such good value for much longer. In fact, the entire banking sector has shown signs of life this year, following publication of the Bank of England’s Bank Liabilities Survey. This lifted banking stocks across the board, by revealing improvements in their capital metrics and retail deposits, and a decline in their funding requirements. Not that I was too worried. HSBC is one of the most strongly capitalised banks of all, with its Core Tier 1 ratio recently up from 12.7% to 13.3%, and has the further security of massive diversified global revenues. But it is another milestone on the long road to financial respectability.
Happy at home
If you feel you’ve missed the boat with Lloyds (up 200% in two years), Royal Bank of Scotland Group (up 70%) or Barclays (up 50%), HSBC could be the best way to cash in on the next phase in the banking sector recovery. I’m glad management has denied plans to sell off a stake in its UK retail banking arm, it doesn’t need that distraction right now, and anyway, why would it want to sell out of the UK’s relatively healthy recovery prospects? The UK is one of HSBC’s two home markets, the other being Hong Kong, and together they contribute more than half of company profits. Q3 profits rose 30% to £4.53 billion, by the way. That looks like a healthy rate of growth to me.
After a stonking 28% rise in earnings per share (EPS) in 2013, growth is forecast to slow to a steady 9% this year. In 2015, EPS should edge up to 11%. That is expected to lift the forecast yield from today’s 4.1% to a forecast 5.9% by December 2015. Patience should turn out to be a virtue with this stock. Exactly one month ago, I predicted that HSBC was the bank to watch in 2014. It is already up 5% since then. Providing there is no major external shock, such as a China blow-up, I would expect HSBC to move up the gears over the next few years. And you can keep pocketing that meaty dividend until the company is cruising again.
