Which would you prefer, a return on your money of 6.2% per annum or 1.5%? This is the difference between an investment in the HSBC (LSE: HSBA) share price and a cash ISA, and today I’m going to explain why I would pick the former over the latter.
Cash is king
Cash ISAs play an essential role in asset allocation because investors should always have some money lying around to cover any unforeseen expenses. However, too much cash can be a drag on your long-term returns, especially when it is earning less than inflation, as many savings accounts are today.
In comparison, not only does the HSBC share price offer a bigger annual return on your money, but it offers the potential for long-term capital growth, which could dramatically increase your profit.
Combining income and capital growth
How much capital growth should investors expect? There is no absolute answer to this question, but we can assume that, all else being equal, the HSBC share price will grow in line with the bank’s earnings over the long term.
Unfortunately, over the past six years, group net profit has fallen by 5% per annum because HSBC has been dealing with a raft of legacy legal issues, and the bank has been restructuring business away from unprofitable markets. These efforts have hit earnings, but in my opinion, they have also primed the group for growth.
If you strip out the impact of one-off costs and charges, earnings per share have increased at a compound annual rate of 8.2% per annum since 2012. For 2018 and 2019, City analysts are forecasting earnings per share growth of between 7% and 4% per annum, slightly below the historical average, although still an acceptable average of 5.5%. If the HSBC share price continues to trade at its current valuation of 12.2 times historical earnings, these growth figures tell me investors could see a capital appreciation of 5.5% per annum for the next two years.
When added to the current income distribution of 6.2% that implies a total annual return of 11.7% per annum for investors buying the HSBC share price today.
A rough example
Having said all of the above, this is just a rough example. I cannot guarantee that the stock will actually produce a double-digit total return for investors over the next two years. Many factors can (and will) influence the share price during this period. Indeed, during the past 10 years, the stock has returned just under 8% per annum.
Still, I think this example clearly shows why HSBC could be a much better investment than a cash ISA over the next 24 months. That’s without mentioning the fact that most of the bank’s profit is generated in Asia, giving it a degree of insulation against Brexit uncertainty and any economic disruption that might engulf the UK after March 29.
Put quite simply, if you want to wake up your money in 2019, the HSBC share price could be the best way to do it.
