HSBC Holdings plc (SEHK: 5) is one of the largest banking and financial services organisations in the world, serving more than 39 million customers.
The company is a favourite stock among dividend investors due to its long track record of paying dividends – more than 20 years! Moreover, its shares have become even more attractive now that they’re trading at a 6.8% yield.
But is the high yield sustainable? Clearly, it’s not a straightforward question.
In this article, I’ll try to get some insights into the question by looking at two aspects of the company.
Does it have a stable business?
Dividend investors are constantly searching for companies that can sustain and grow their dividends over time. Such companies are those with good business models that can sustain, or better still, grow profits over the long run.
In other words, we want to find out whether HSBC has a stable business. Let’s look at some simple numbers.
In the last 10 years, HSBC has always been profitable, even during the Global Financial Crisis of 2009. That track record indicates the strength of its business. Profit before tax, however, has fluctuated during this period.
It reached a high of US$22.6 billion in 2013 and a low of US$7.1 billion in 2016 (it was hit by non-recurring credit losses and impairments). As of 2018, profit before tax has recovered to US$19.9 billion.
In general, HSBC has a reasonably stable business that generates profits over time. This is partially offset by occasional hiccups (like 2016) when the company was hit by non-recurring events.
Does it have a reasonable payout ratio?
The next thing to consider here for investors is the dividend payout ratio of the company. As a quick introduction, this is the percentage of earnings that a company pays to its shareholders in the form of dividends. For example, a company paying HK$1 in dividends for every HK$10 in net profit has a payout ratio of 10%.
Here, what we would like to see it that HSBC is currently paying a low percentage of its earnings as dividends. This will provide a margin of safety for it to sustain dividend payments for the foreseeable future (assuming that it maintains profitability).
The numbers then. In 2018, HSBC paid out a US$0.51 dividend per share (DPS). This gives it a payout ratio of 81% (EPS was US$0.63).
Personally, the 81% payout ratio was reasonable since it was below 100% – offering us a margin of safety of 19%.
Overall, I think HSBC is well-positioned to sustain its dividends, so long as it can sustain its profitability. So far, HSBC has done reasonably well in the first nine months of 2019 as reported profit before tax was up 4% to US$17.2bn.
Yet, investors should also keep an eye on how the Hong Kong protests, as well as the newly-developing coronavirus, might affect its business in the near term.
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 Lawrence Nga doesn’t own shares in any companies mentioned.