Saturday 28 February 2015

BUY: HSBC--Topping up on the Swiss cheese bank

Price: 578.58
Shares: 121 (this purchase) and 284 (entire holding)
Predicted annual dividend income: £39.32 (this purchase) and £91.97 (entire holding)

Best laid plans and all that. Despite intending to step back from investment in the financial sector for a little while I find myself pulled in once again. No new holdings, however. This time again it is a top up. My target this occasion? International banking titan HSBC.

I have previously picked up shares in HSBC in May and October 2014 as the share slowly but surely shed their value. Since then they have spent most of the time higher than my purchase price. However, since December 2014 the trend has been pretty much one way: down.

Since my last purchase a lot has happened. Most of it in the last few weeks. This chiefly revolves around the activities of the HSBC Swiss segment of the company back in 2007 and after. They, it appears, actively looked to assist many of their super rich customers burrow away cash from the authorities. Their complicity in this goes much deeper though.

As a result, they are now very much in hot water.

Not unsurprisingly their share price has thus been hit quite hard in recent days. This was compounded by a rather surprising and poor Q4 set of results. This led to a 4.63% plummet in the share price from about 610p per share to around 566p--a 52 week low.

Certainly, all this sounds suitably apocalyptic. Their reputation as one of the "good" banks has been rendered as holey as Swiss cheese by the HSBC Swiss affair. However, does this make them uninvestable at the moment? I don't think so.

First, the bank is still highly profitable. Yes, its capital buffer has not grown as much as hoped and its efficiency has been rather sharply affected by various compliance issues and more besides.

Nonetheless, the bank is still amongst the best in the industry and is well placed to benefit from long term trends (especially, the continuing--if partially stalling--Asian growth story).

The price drop thus offered me a tantalising opportunity to beef up my holding.

Any Value Left?

So how do the numbers line up? (NB: Since I wrote my last article I have changed my stock analysis sheets so that I can enter their values directly in their currency, in this case USD). 

For this year--although the results have been announced--the analysts were predicting this (at a USD to GBP rate of 0.65):

EPSP/E Ratio
Difference (%)49.55
Thanks to the price drop, the P/E has actually strengthened since I bought into HSBC again in October. The P/E now sits at a low 10.13 (from 10.84). 

Of course, the lowest estimate has been revised down, however. Now sitting at 13.3 rather than 12.92 even with the price drop.  Nonetheless, even at that most pessimistic prediction, it is far from dear.

So what about next year? 

EPSP/E Ratio
Difference (%)46.05

Again, the consensus P/E is lower than predicted back in October at 9.79 rather than 10.06. However, this was chiefly again thanks to the share price weakness. In reality the EPS predictions have been revised down from about $0.93 to $0.9128.

However, the lowest P/E estimate of 12.07 is again far from outrageous. And, in fact, the underlying EPS prediction here has been revised up.

What is more, on the consensus predictions, HSBC is expected to see EPS growth of about 3.5%. Not rocket-style growth, maybe, not not overly sluggish either.

All in all, these are all rather encouraging figures.  

Dividend Still Holding Up?

So what about the all-important dividend? Again, the news appears good.

Analysts were a little wrong with this year's predicted dividend. They predicetd a dividend of $0.512 per share. In reality, the total has been $0.50 for the year.

For next year they still have a prediction of an 8% on this years $0.50 dividend to $0.544 per share. I expect this to be revised down in time to be a bit closer to the growth expected for next year. 

However, on that prediction I would be yielding 6.09% on this purchase. A stonking yield.

What is more, on consensus EPS figures the 2015 dividend is set to be covered at least 1.68 times by earnings. Even on the lowest EPS figures it should still be covered 1.36 times by earnings.

Even with the likely revisions forthcoming this should mean that the dividend will still be pretty comfortably covered by earnings and yielding a very high amount. Excellent news indeed.

HSBC and My Goals

So how does my new addition fit into my goals for the year? Well, in general, not too bad.

HSBC continues to have a quite low volatility as shown by a Beta value of about 0.89. For a bank this is remarkably low. As such, it should not push me too far away from my target of a portfolio Beta of 0.85 or less.

The yield of c.6% is also very helpful towards my portfolio yield target of 4% or more. I will also receive all four of the quarterly dividends for this year which means that the £40 or so additional dividend income from this purchase will add positively to my 2015 dividend income target of £800.

However, there are some concerns. Prior to this purchase HSBC had already been my second biggest holding. Now this status has been confirmed even more.

This also means that my exposure to financials has grown noticeably to over a quarter of my entire portfolio. Of course, the financial sector is a rather diverse one. As such, my exposure to the insurance and reinsurance sector had made up a lot of that financial segment.

However, now banks alone now represents my biggest supersector and makes up about 16% of my portfolio. This I would, most certainly, like to see reduced significantly over time.

Overall, I remain happy with my increased holding in HSBC. I expect the company to soon be back in its stride over the medium term. As such, it should be a good investment and it looks as though I am going to be paid well to wait with a high and solid dividend yield!

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