UK banking stocks were once a happy hunting ground for dividend investors, however the landscape has changed in recent years.
It’s no longer plain-sailing in the banking sector as rock-bottom interest rates and a tougher regulatory environment have made it harder for banks to generate consistent profits. And low profits have made life more difficult for income investors.
While Lloyds Banking Group is forecast to increase its dividend next year, Barclays recently announced that it would be slashing its dividend in half for the next two years, taking its yield to just 1.7%. So what about HSBC Holdings (LSE: HSBA)?
A quick glance at HSBC reveals that the stock is trading on a P/E ratio of 11.2 with a dividend yield of 7.6%. At face value, these figures look attractive. This is the highest yield in the FTSE 100 and the third largest among banks globally.
And while it’s tempting to pile into the stock in the quest for high dividend payouts, experienced dividend investors will know that whenever a yield is this high, it needs to be questioned as to whether it’s sustainable.
The market clearly has doubts – the share price decline of 27% in the last 12 months suggests investors believe a dividend cut is imminent. This view was recently echoed by Ian Tabberer, a fund manager at Henderson Global Investors who stated: “Owners of the stock need to be aware that there is a very high probability that HSBC is going to have to cut its dividend in the next 12 to 18 months.”
That sentiment is worrying for dividend investors as a cut in the dividend could lead to both a loss of income and a further loss in the share price, resulting in a double-blow for portfolio performance.
Committed to the dividend
The good news for HSBC shareholders is that management clearly puts a strong focus on the bank’s share price and the dividend yield.
Speaking recently at HSBC’s annual shareholder meeting, Chief Executive Stuart Gulliver suggested he wasn’t happy with the recent decline in the share price and was quoted as saying: “Our ability to pay an industry-leading dividend continues to set HSBC apart. We remain committed to a progressive dividend, subject to the overall long-term profitability of the group and the further release of less efficiently deployed capital.”
Gulliver pointed to progress on the restructuring plan as evidence that HSBC can offset the impact of an expected downturn in the wider economic climate. And interestingly, the majority of sell-side analysts seem to believe the dividend will actually be upheld.
Citigroup has forecast dividends of 51 cents, 53 cents and 56 cents over the next three years. Deutsche Bank has pencilled-in dividends of 52 cents, 53 cents and 54 cents. And Berenberg believes HSBC will pay 51 centseach year for the next three years, saying it wouldn’t make sense for HSBC to cut the dividend, due to the lack of other opportunities to reinvest the capital.
So all in all, it looks like HSBC’s huge 7.6% dividend yield may actually be safe for now, which is great news for income investors.
Of course, there are still many risks present, in the form of weak global growth, a slowdown in China, low interest rates and the possibility of the UK leaving Europe.
