Why I’d buy this bank over HSBC Holdings plc

HSBC Holdings plc (LON: HSBA) looks cheap and has a high dividend yield. But is this smaller bank a better buy?

| 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 Holdings (LSE: HSBA) is one of the most popular banking stocks in the UK. That’s understandable, as the bank looks relatively cheap from a valuation perspective, and offers a high dividend yield. Does that make HSBC a strong buy? I’m not so sure.

Frozen dividend

HSBC currently trades on a forward P/E ratio of a reasonable 13.5. Furthermore, after paying out 51 cents per share in dividends last year, the bank’s yield is a high 5.3%. While those metrics might normally tempt me, there’s a couple of factors that put me off buying shares in the £147bn market cap bank. 

The first is the frozen dividend. As a ‘dividend growth’ investor, I’m trying to build an income stream that increases year after year. Therefore, I look for companies that have increased their payouts in the past, and that are likely to increase them in the future.

My issue with HSBC is that the bank froze its dividend last year at and has stated: “In the current uncertain environment we plan to sustain the dividend at its current level for the foreseeable future.” With City analysts predicting the same payment this year and next, and inflation running at around 3% per year, the purchasing power of HSBC’s dividend is diminishing over time.

Furthermore, HSBC’s dividend coverage is low. Last year it was just 0.14 times, and while it is predicted to improve dramatically this year to a ratio of 1.37, that’s still a figure regarded as relatively risky. As a result, I won’t be buying shares in the bank for now.

A better banking stock?

However, one peer stock that does offer considerable appeal right now, in my view, is OneSavings Bank (LSE: OSB). The challenger bank is a specialist lender and retail savings group that offers residential, buy-to-let and commercial mortgages, secured loans, development finance and savings solutions.

Profitability has soared in recent years, with net profit surging from £27m to £121m in the last three years alone. A trading update released this morning revealed further progress. It saw loan book growth of 17% for the nine months to 30 September, and stated that it expects net loan book growth of 20% for the full year. CEO Andy Golding commented: “OSB has yet again delivered exceptional performance in the third quarter of 2017 with strong loan book growth and record levels of organic originations at attractive margins.”

The bank clearly has momentum at present, yet that’s not reflected in the share price, in my opinion. With analysts expecting earnings of 48.3p per share this year, the stock trades on an insanely low forward P/E ratio of just 8.7.

Furthermore, the dividend prospects here look very appealing. After paying a maiden dividend of 3.9p in 2014, it has lifted its payout significantly over the last two years, paying out 8.7p and 10.5p per share. This year, analysts expect 20% growth to 12.6p, a yield of 3%, with coverage anticipated to be almost four times.

Shares in smaller companies such as OneSavings Bank can be more volatile than shares in blue-chip firms such as HSBC. However, for long-term investors, I believe the potential rewards on offer here outweigh the risks.

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.

Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has recommended HSBC Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

Is the S&P 500 going to 10,000 by 2030? This expert thinks so

One stock market strategist sees animal spirits taking hold and driving the S&P 500 index even higher by the end…

Read more »

Investing Articles

I’m expecting my Phoenix Group shares to give me a total return of 25% in 2025!

Phoenix Group shares have had a difficult few months but that doesn't worry Harvey Jones. He loves their 10%+ yield…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

14.5bn reasons why I think the Legal & General share price is at least 11% undervalued

According to our writer, the Legal & General share price doesn’t appear to reflect the underlying profitability of the business. 

Read more »