From a customer’s perspective, bank fees can be very annoying. From a shareholder’s, though, they may be less annoying if they help a bank earn profits and deliver dividends. Take HSBC (LSE: HSBA) as an example — the dividend yield is currently a juicy 7%, and the lender is generating significant excess capital despite funding that.
Could things get even better from here – and ought I to invest?
Impressive dividend payout
To begin, we should put the current dividend in context. The high yield is based on the payout last year. But that was unusually large.
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Dividends are never guaranteed – and the HSBC payout is a good illustration of this.
As the chart above shows, the dividend has been cut twice over the past couple of decades, once after the financial crisis and again during the pandemic. On both occasions, it took many years for it to get back to where it had been before the cut.
That is a common risk with banks, including HSBC. When the economy does well, it is easier for them to make money. But when economic storm clouds gather, that can hurt profits – and dividends can be cut fast.
In this sense, HSBC’s increased exposure to Asia due to moves like getting rid of Canadian and French businesses means that any economic downturn in Asia may hit the bank more compared to better diversified rivals.
Solid performance
Still, looking at its interim results released today (31 July), the bank seems to be performing well.
For the first half of the year, revenue fell slightly compared to the same period last year. So too did profits after tax. That fall was only around 2%, though, and profits after tax still came in at a whopping £13.7bn. That continues the strong performance seen last year.
Recent profits after tax have been far above historic levels, so there is a risk we are in a boom time for HSBC that will not last. On the other hand, bulls could argue that the bank’s strategic focus and cost-cutting in recent years have put it in better shape than before and the strong recent results demonstrate that.
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Indeed, the company generated so much excess cash that it announced plans to buy back up to around £2.3bn of its shares over the next three months.
Still, while there was a special dividend in the first half, the two ordinary dividends declared for the six-month period were the same as last year.
I’m not buying
HSBC shares are up just 9% in five years, so the dividend yield is a key part of the investment case at the moment in my view.
Strong cash generation, as suggested by the share buyback, is reassuring.
But the flat ordinary dividend combined with historically high profit levels over the past 18 months mean that I fear the dividend could be cut when there is another banking downturn. For now I have no plans to invest.
The post Could the HSBC dividend yield of 7% get even larger? appeared first on The Motley Fool UK.
Pound coins for sale — 31 pence?
This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
See the full investment case
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HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
