Is HSBC Holdings plc Really A Safe Dividend Investment?

HSBC Holdings plc’s (LON: HSBA) dividend as safe as you think?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

HSBC (LSE: HSBA) (NYSE: HSBC.US) is one of the FTSE 100‘s dividend champions. The company currently supports a dividend yield of 5.3%, far above the FTSE 100’s average of around 3%.

What’s more, City analysts expect HSBC’s dividend payout to grow around 10% per annum for next few years indicating that by 2016, the company’s yield will have risen to 6.3%. 

However, it remains to be seen how safe this dividend payout really is. Indeed, HSBC is facing multiple headwinds right now that are squeezing the company’s top and bottom lines, compressing profit margins and leaving less cash for dividend payouts. 

Three key mistakes

There are three key traits that should be present in every dividend-paying company. Firstly, the company’s dividend should be well covered by earnings with room for growth. Many investors confuse a high yield with safety; this is not the case. A low dividend yield with more potential for growth over the long term is often the better pick. 

HSBC dividend payout is covered one-and-a-half times by earnings per share, which leaves room for growth. That said, the company’s dividend cover has fallen steadily over the past five years, which indicates that the group’s dividend is growing faster than its earnings.

Over the long term, this rapid payout growth could become an issue for HSBC. In particular, the group could be forced to rethink its dividend policy going forward in order to ensure that the payout remains well covered with room for growth. 

Secondly, investors need to consider HSBC’s long-term stability. In other words, how safe is the bank? Realistically, it’s almost impossible to answer this question. Even some of the City’s top banking analysts have no idea how to correctly asses the risks on HSBC’s balance sheet. 

Some analysts have claimed that HSBC is facing a $100bn capital shortfall but few analysts have been able to verify this conclusion. On the other hand, HSBC has passed ever stress test regulators have thrown at it over the past few years. So, for the time being HSBC looks safe.

And lastly, the best dividend companies have sustainable dividend payouts. In other words, the payouts are well covered and here to stay.

This is a trait HSBC might not have. The bank has a history of cutting its payout when the going gets tough. For example, during 1999 the dividend was slashed by 60% as the dotcom bubble burst, and the payout was cut again by 50% during 2008 — that’s twice in 10 years.

In comparison, Capita’s record of paying dividends has been unbroken since October 1987 — that’s nearly three decades, a record that puts HSBC’s dividend history to shame. 

The bottom line 

So, how safe is HSBC’s dividend current dividend payout? Well, based on the bank’s dividend record, I think that a dividend cut is likely at some point in the next few years…

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

5 steps to start buying shares with under £500

Learn how this writer would start buying shares with a few hundred pounds in a handful of steps, if he…

Read more »

Young happy white woman loading groceries into the back of her car
Investing Articles

The FTSE 100 offers some great bargains. Is this one?

Our writer digs into one FTSE 100 share that has had a rough 2024 to date, ahead of its interim…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

£9,000 of savings? Here’s my 3-step approach to aim for £1,794 in passive income

Christopher Ruane walks through the practical steps he would take to try and turn £9,000 into a sizeable passive income…

Read more »

Group of young friends toasting each other with beers in a pub
Investing Articles

I’d buy 29,412 shares of this UK dividend stock for £150 a month in passive income

Insiders have been buying this dividend stock, which offers an 8.5% yield. Roland Head explains why he’d choose the shares…

Read more »

Red briefcase with the words Budget HM Treasury embossed in gold
Investing Articles

Could the new UK budget spell growth for these 6 FTSE stocks? I think so!

Mark David Hartley considers six UK stocks that could enjoy growth off the back of new measures announced in the…

Read more »

Investing Articles

With a 6.6% yield, is now the right time to add this income stock to my ISA?

Our writer’s looking to boost his Stocks and Shares ISA. With this in mind, he’s debating whether to buy a…

Read more »

Dividend Shares

This blue-chip FTSE stock just fell 12.5% in a day. Is it time to consider buying?

Smith & Nephew is a well-known, blue-chip FTSE stock with a decent dividend yield. And its share price just dropped…

Read more »

Investing Articles

At 72p, the Vodafone share price looks to be at least 33% undervalued to me

Our writer looks at a number of valuation measures to determine whether the Vodafone share price reflects the fair value…

Read more »