As HSBC‘s (LSE: HSBA) shares have plunged to a three-year low during the past few months, the company’s dividend yield has risen to an impressive 6.3%.
However, a high dividend yield such as HSBC’s can often signal that the market is losing its faith in the company’s ability to main the payout. A falling share price can indicate a dividend cut or, worse, the elimination of the dividend.
Prioritising the dividend
HSBC’s management has put the company’s dividend policy at the top of it agenda. Unfortunately, by taking this route, the company is prioritising dividends over growth, which isn’t a great long-term investment strategy.
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At the beginning of June, HSBC laid out its plans to safeguard the dividend by cutting one in five jobs and shrinking its investment bank. What’s more, the bank intends to cut its assets by a quarter, or $290bn by 2017. These cuts will reduce the size of HSBC’s investment bank assets to less than a third of total group assets, from 40% now.
So far, the strategy of slashing costs to boost returns hasn’t worked out for the bank. The higher cost of doing business in a tougher post-crisis business environment that’s overshadowed by new rules on risk and compliance won’t fall just because HSBC decides to shrink its balance sheet and cut staff numbers.
Overall, HSBC will push through annual cost savings of up to $5bn by 2017. It will cost up to $4.5bn during the next three years to achieve the savings.
Exiting markets
In addition to cost savings, HSBC is planning to exit the markets where a weak performance or high conduct costs and fines have destroyed value. The markets that tick this box are Brazil, Turkey, Mexico, the United States and Britain.
And as HSBC exits these markets, the bank is refocusing its growth efforts on China. HSBC already generates a significant chunk of its income in Hong Kong and has become reliant on this market to produce group growth. For the first-half of 2015, HSBC’s profit jumped 10%, thanks to an investing frenzy in Hong Kong among individual customers prompted by China’s soaring markets earlier in the year.
By exiting underperforming markets, HSBC is reducing its international diversification, and global footprint, the one thing that makes it unique. Over the next few years, HSBC will become a more Asia-focused bank, and as a result, the bank’s growth will become highly correlated to China’s economic success.
It’s no secret that China’s debt-laden economy is struggling. HSBC stands to take a huge hit if China’s growth hits a wall. Many Asian economies feed off China’s success, and any slow-down will reverberate across the region.
So all in all, by reducing its international diversification and focusing on China, HSBC is putting itself in a very vulnerable position. Focusing on China may not be the best decision for the bank.
