HSBC (LSE: HSBA) and GlaxoSmithKline (LSE: GSK) are two of the FTSE 100’s dividend champions. HSBC’s shares currently support a dividend yield of 8.5%, and Glaxo’s shares support a dividend yield of 5.4%.
The question is, can these yields be trusted?
Can you trust the yields?
Investors are often advised to give the largest yields on the market a wide berth as a larger-than-average dividend yield often indicates that the payout isn’t sustainable. Although this isn’t always the case.
Following a strategy of buying the highest yielding FTSE 100 stocks can generate some impressive results over time, but this strategy isn’t for the fainthearted. Indeed, as we’ve seen over the past 12 months, even those payouts previously considered safe can be cut at a moment’s notice.
Still, HSBC’s management has gone out of its way to reassure investors that the current dividend payout is here to stay for the foreseeable future. Specifically, on the bank’s fourth-quarter and full-year 2015 earnings conference call, Ian Mackay, finance director of HSBC told the listening analysts that a dividend cut last year was never, ever on the cards. When asked what would have to happen for the dividend to be cut, Mackay said, “the last time we cut the dividend was in the teeth of the global financial crisis when we had to do a rights issue and were sitting on $160bn of US sub prime mortgages.” In other words, HSBC is only likely to cut its dividend payout if a sudden global economic crisis emerges. The problem with this statement is that the last time around, few saw the crisis coming, and it’s highly likely the next crisis will also be a complete surprise.
The bank posted a net loss of £878m for the fourth quarter of 2015, much worse than expected, and that translated to a fall of 1.2% in annual profits for the year.
Here to stay
On the other hand, Glaxo’s dividend is unlikely to be cut if/when the next global economic crisis takes the world by storm. The defensive nature of Glaxo’s business means that the company’s cash flows are relatively stable throughout all stages of the economic cycle, unlike HSBC, which as a bank is a highly cyclical business. So, in theory, Glaxo’s dividend payout should be more sustainable than that of HSBC.
What’s more, management has guaranteed that the company’s 80p per share annual dividend payout is here to stay for the time being so a dividend yield of 5.4% looks safe. The group is on track to achieve annualised cost savings of £3bn by the end of 2017 and with around 4.9bn shares in issue, a dividend of 80p per share per annum is costing Glaxo around £3.9bn per annum to maintain.
