HSBC’s (LSE: HSBA) share price has risen around 10% from when I bought it three weeks ago.
I purchased it then because it looked very undervalued against its international peers to me.
At over £7 a share now, nothing has changed, in my view, and I will be buying more very soon.
A huge bargain?
On the key price-to-earnings (P/E) stock valuation measurement, HSBC currently trades at 7.4. This aligns with its UK banks’ peer group average P/E, so it does not look undervalued on that basis.
Crucially though, all UK banks – except Standard Chartered – look undervalued against European banks that have an average P/E of 8.1.
Even Russian Commercial Roads Bank trades on Russia’s primary stock exchange at a P/E of 8.1 and it is under international sanctions!
So, I ran a more comprehensive discounted cash flow analysis using other analysts’ figures and my own.
This shows HSBC shares to be 53% undervalued right now, even after the recent price rise. Therefore, a fair value would be around £15.19, compared to the current £7.14.
This does not necessarily mean they will ever reach that price, of course. But it underlines to me how cheap they still look.
Strong business going forward?
Noel Quinn’s recently announced departure as CEO does not affect my view of the stock. It is a banking giant, and the CEO tends to be just one cog in that machine.
A more realistic risk comes from falling UK interest rates. This could cause HSBC’s net interest margins (NIM) to drop. This is the difference between the interest it receives on loans and the rate it pays for deposits.
Another risk remains a new global financial crisis.
However, in its Q1 2024 results released on 30 April, HSBC’s NIM fell by just 0.06% from Q1 2023. It was actually up 0.11% overall compared to Q4 2023, due to ongoing strong NIMs in its other banking operations.
This positive surprise was echoed in Q1 2024’s revenue of $20.8bn — up 24% year on year. Net income rose 2.5% over the same period — to $10.6bn.
Overall, profit before tax for the quarter showed a decline of $0.2bn – to $12.7bn. This was principally due to net impairment losses from the sales of its businesses in Canada, Argentina, and France.
Right now, consensus analysts’ estimates are that revenue will grow at 3.7% a year to end-2026. Return on equity is forecast to be 11.7% by that time.
High dividend
I did not expect HSBC stock to rise so quickly after I had bought it. I was more than happy to wait for any share price rise, as I would be compensated with high dividend payouts.
Dividend yields fall as share prices rise, so the payout has declined slightly in the past three weeks.
However, the 2023 dividend of 61 cents (49p) a share currently yields 6.9%. This compares to the average FTSE 100 yield of 3.8%.
So, £10,000 invested in HSBC now at a yield of 6.9% would make an additional £9,898 after 10 years. This is provided the dividends are reinvested in the stock, and the dividend averaged the same.
Given its high yield, extreme undervaluation in my view, and good growth prospects, I will increase my holding in HSBC shortly.
