With the new ISA season little more than a month away, it really is time to use up the last of the current year’s allowance if you can — and to start thinking what you’ll do with the new allowance of £11,760 set to come your way in April.
Now, you might be a bit cautious of putting some of your hard-earned into bank shares, after the calamities of the past few years. But to make the best possible use of that tax-free allowance, I’d strongly recommend going for shares that will reward you over 20 years or more, not over just 2 or 3 years.
Banks are good!
And I reckon HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US) stands a very good chance of doing just that.
Admittedly, the long term starts with but a single year, so what are the prospects for HSBC looking like? Here are the next three years’ forecasts:
| Dec | EPS | Change | P/E | Dividend | Change | Yield | Cover |
|---|---|---|---|---|---|---|---|
| 2013 | 56.1p | +27% | 11.7 | 30.9p | 0% | 4.8% | 1.8x |
| 2014 | 61.4p | +9% | 10.7 | 34.5p | +12% | 5.4% | 1.8x |
| 2015 | 67.8p | +10% | 9.7 | 38.5p | +12% | 6.0% | 1.8x |
With last year’s results due very soon, those 2013 expectations are going to be pretty near the mark now — at Q3 time, the bank reported a 15% rise in pre-tax profit for the nine months to September, to $18bn, and earnings per share (EPS) was picking up nicely.
But how reliable are those next two years of predictions?
Beware China
The big fear right now is China, which is experiencing the double-threat of burgeoning credit coupled with a booming property market — does that sound at all familiar? With HSBC doing a lot of its business in the Asian region, and a third of 2012’s profits coming from Hong Kong alone, it’s clearly at risk if that should come crashing down.
But it’s sobering to look back at the effect of the Western banking crisis on HSBC — just a couple of tough years. The dividend (which I think is key to an ISA investment in HSBC) was cut in 2009. But only to 3%, which is still close to average for the FTSE, and by 2011 HSBC’s yield was back to 5%.
The value of dividends
In absolute terms the dividend isn’t quite back to pre-crash levels, but getting back to a 5% yield so quickly really does put even the worst banking crisis faced by the world in decades into perspective.
Let’s assume that HSBC shares don’t put on a single penny over the next 20 years (and with a two-year-out P/E of under 10, I think that’s most unlikely), what would it be worth just in dividends if the cash is reinvested in shares each year?
Shares beat savings
Well, £1,000 in a typical savings account earning 1.7% for 20 years would grow into £1,400 — but the same in HSBC in your ISA would turn into £2,600 assuming an annual 5% dividend. And if the share price should only keep pace with inflation, you’d see £3,900 at the end of it. Easy choice, I’d say.
