Banking and financial services giant HSBC Holdings (LSE: HSBA) has seen its share price rise by around 67% over the past three years.
However, even now with the stock near 720p, the forward-looking dividend yield for 2025 is a tempting 6.7% or so.
But the multi-year record shows volatility for revenue, earnings, cash flow, dividends, and the share price. When it comes to cyclical companies, HSBC is one of best examples of the pitfalls that can await shareholders.
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I remember the days a few years back when investors had high hopes for the growth of the business because of its Asian focus and wider international operations. But the share-price chart shows that an investment in the stock made 20 years ago will have gone essentially nowhere.
A good quarter, but…
Of course, there will have been a stream of ebbing and flowing dividends to collect along the way. But a two-decade commitment to the stock will have involved a lot of opportunity cost along the way.
For example, investors could have invested in international equipment rental company Ashstead Group instead. Since October 2004, that one’s up by more than 9,500%. On top of that capital performance, shareholders would have received dividends too.
Is that an outlier on the London stock market? Maybe, so let’s say an investor chose Intercontinental Hotels Group instead. Since the autumn of two decades ago, the stock has risen by a modest 1,150% or so with dividends on top.
There have been other outperformers, but the point is made. Based on HSBC’s long-term performance over the past 20 years, I’d be reluctant to bet on it delivering a decent return over the coming decades.
However, in today’s (29 October) third-quarter earnings release statement, chief executive Georges Elhedery said the company delivered another good quarter, “which shows that our strategy is working”.
Reshaping for better growth
Looking ahead, Elhedery is “committed” to building on the firm’s strong platform for growth. Part of the plan involves creating a “simpler, more dynamic, more agile organisation with clearer lines of accountability and faster decision-making”.
To me, that statement suggests the business had previously become complex, slothful, and rigid with blurred lines of accountability, and glacial decision-making. Perhaps that explains why the long-term performance of the enterprise has been so poor.
However, it’s not the whole story. HSBC’s financial and banking business is in perhaps the most cyclical sector that it’s possible to be in. Cyclicality is difficult to manage, but if the business can transform itself into a more entrepreneurial organisation, there’s a chance shareholders may see better performance ahead.
After all, Ashstead and Intercontinental Hotels also operate in cyclical sectors, but that fact hasn’t stopped them forging ahead with impressive programmes of expansion.
However, on balance I’m a little wary of HSBC shares right now. The share price has been strong for three years now and I like to try to catch the cyclicals when they are bottoming. My fear is the business and the stock may lurch down again at some point.
Nevertheless, I admit the dividend yield is tempting. But for me, there are other stock opportunities I’d rather pursue, so I’ll be watching HSBC with interest, from the sidelines.
