The HSBC (LSE: HSBA) share price has plummeted in value over the past 12 months. At the beginning of September 2019, the stock was changing hands for around £6. Today, it’s worth nearly half that.
The company’s dividend has failed to compensate investors for this low return.
Earlier this year, HSBC was asked to suspend its dividend by regulators here in the UK. The move from regulators, which prompted outrage among shareholders, was designed to shore up the group’s balance sheet.
I think this was a sensible decision. Even though the dividend suspension was disappointing, (the HSBC share price previously offered one of the biggest dividends in the FTSE 100) the bank needed to be cautious. We still don’t know how much of an impact the coronavirus crisis will have on the global economy.
Banks like HSBC have already been forced to write-off hundreds of billions of pounds worth of loans. Paying a dividend in such an uncertain environment could cause the business further headaches in the future.
Unfortunately, at this point, it’s unclear if, or when, the company will restore its dividend. Management has said the payout will remain on ice until at least the end of 2020.
City analysts expect the dividend to be reintroduced next year at $0.30 per share. That implies a prospective dividend yield of 7% on the HSBC share price.
Cheap shares
Aside from its dividend potential, there are other reasons why the stock looks attractive right now. Shares in the banking giant are currently changing hands at a price-to-book (P/B) value of just 0.5. That’s substantially below its long-term average of 1.
In theory, profitable businesses shouldn’t trade at a discount the value of their net assets. As such, it looks as if the HSBC share price offers a wide margin of safety at current levels.
However, despite the company’s attractive valuation and dividend potential, there are some other reasons why investor sentiment towards HSBC could remain depressed.
HSBC share price sentiment
The banking giant’s exposure to Hong Kong, which was previously an advantage, has become a disadvantage. What’s more, the group’s international diversification, which also used to be an advantage, has become another disadvantage.
As a result, HSBC could face some hard choices in the years ahead. Its Hong Kong business generates almost all of the group’s profits. Meanwhile, its European and US arms are struggling to break even.
Some analysts have speculated that the company might be better off abandoning these markets entirely, to focus on China. That’s one possible option.
In the meantime, management is slashing costs via job losses. The group could also exit some unprofitable markets. This is likely to weigh on profitability in the near term, and could also impact HSBC’s dividend prospects.
There are lots of moving parts here, and that means it’s challenging to establish whether or not the HSBC share price is an attractive buy at current levels.
The stock looks cheap, but the bank’s outlook is far from clear. On that basis, it may be best to own HSBC as part of a diversified portfolio. This would allow investors to profit from any upside but minimise downside risk if the business continues to languish.
