5 December 2016

HSBC

To pay or not to pay

by John Royden

Head of Research

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Price
£6.41
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52 Week High-Low
£6.46–£4.14
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Net Yield
6.34%
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Hist / Pros Per
37.4–13.8
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Equity Market Cap
£125,742m

To pay or not to pay. HSBC is a global bank with 58 million customers across its retail and commercial banking franchises. About 40% of revenues and about 80% of operating profits come from Asia with most of the latter coming out of Hong Kong.
The conundrum with HSBC is the 6.3% dividend yield. Will they hold it? In February of this year, the company increased its dividend from 50¢ to 51¢ per share, which suggests they will, as Directors tend not to increase dividends into expected adversity. The second clue comes from our analysis of the cash flows emanating from the bank.

Working out what happens to a bank’s operational cash flows is one thing. HSBC’s operating cash flows look encouraging after their November third quarter results. Working out what happens to its balance sheet is another. A widget manufacturer’s balance sheet of mostly factory machinery is pretty much going to look the same year after year. Contrast that with a bank’s balance sheet where, for example, the simple decision to remove the interest rate hedges on their loan book can move the dial by multiple percents. On balance I think that HSBC will pull through.

John Royden is a beneficial owner of HSBC.


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