The Motley Fool

Is HSBC’s Dividend Sustainable?

HSBC Holdings plc (SEHK:0005), an Asia-focused global banking giant, is under pressure on many fronts. China’s economy is slowing. Virtual banks are popping up in Hong Kong. The bank is going through a major internal restructuring. And if that wasn’t enough, the trade tensions between China and the US have also hurt business.

Giving investors a dividend yield of around 6.6% at its current share price, HSBC’s income appeal on the surface is attractive. But the more important question for long-term dividend investors is; can the bank maintain its dividend despite the many challenges?

Previous HSBC dividend history

For the last five years, HSBC’s dividend has been dependable – yet also pretty much flat. The bank’s dividend per share (DPS) increased ever so slightly in 2015, and has been steady ever since. 

HSBC Holdings – dividend per share (US$)

2014 2015 2016 2017 2018
0.50 0.51 0.51 0.51 0.51

Source: HSBC Holdings Investor Relations

For 2019, HSBC’s DPS looks set to be the same as the bank has paid the same quarterly dividends as it has in the prior year period.

HSBC fundamentals

Although HSBC’s fundamentals have been average when viewing the company’s first nine months of 2019 as a whole, the company reported a disappointing third quarter.

HSBC’s adjusted profit before tax for the first nine months of 2019 was up US$50 million year-on-year.

For the third quarter, HSBC reported profit before tax of US$4.8 billion, down 18% year-on-year. Adjusted profit before tax fell 12% to US$5.3 billion. Management also has a softer outlook for sales growth.

Looking ahead, there might be restructuring charges in the fourth quarter and beyond as HSBC rebalances its capital away from relatively low-return segments (including Europe and the US) to higher-growth and return opportunities in places such as Asia.

The good news is that management doesn’t think the future charges, if any, will affect the dividend. They said in the third-quarter earnings press release that they intend to sustain the dividend.

HSBC also has a strong balance sheet with a common equity tier-1 ratio of 14.3% and the bank has been rumuored to consider trimming its workforce to become more efficient. A strong balance sheet and cost cuts could help bridge any short-term cash flow shortages.

What the stock market thinks

The stock market is made up of many savvy institutions and investors who, together, collectively process data into stock prices. Although the market is prone to bubbles and overreactions, stock prices often reflect information and the future better than anything else.

In terms of the market’s perspective, HSBC isn’t in the danger zone. The bank’s dividend yield isn’t high enough that it indicates a dividend cut. HSBC’s yield has hovered around 6.5% before in 2016 and the bank hasn’t cut its dividend since then.

Financial crisis stress test

Top-quality dividend stocks maintain or raise their dividends across the entire market cycle no matter what. From the entire market cycle perspective, HSBC isn’t one of those dividend stocks.

Due to the near-collapse of the global financial system in 2008, HSBC cut its dividend during the financial crisis. To be fair, many of HSBC’s global financial peers also cut their dividends.

HSBC Holdings – dividend per share (US$)

2007 2008 2009 2010
$0.90 $0.64 $0.34 $0.36

Source: HSBC Holdings Investor Relations

If the global or Chinese economy experiences anything on the scale of what happened in 2008, then HSBC could certainly cut its dividend. However, currently, things don’t look that bad.

Foolish conclusion

Unless HSBC’s fundamentals get noticeably worse beyond management’s current forecasts or if another financial crisis occurs, the odds are good that HSBC will continue to either maintain or increase its dividend.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Jay Yao doesn’t own shares in any companies mentioned.